Table ofContents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

| **x**                                                                                                                                                                                                               | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                          | ** **                                                                                              |
| **For the quarterly period ended June 30,  2009**                                                                                                                                                              |
| ** **                                                                                                                                                                                                          | ** **                                                                                              |
| **OR**                                                                                                                                                                                                              |
| ** **                                                                                                                                                                                                          | ** **                                                                                              |
| **o**                                                                                                                                                                                                               | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                          | ** **                                                                                              |
| **For the transition period from to                             ** |

 

**COMMISSION FILE NUMBER 000-29661**

 

**UTSTARCOM, INC.**

(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                             | ** ** | **52-1782500**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                 |       | (I.R.S. Employer Identification No.) |
|                                     |       |                                 |
| **1275 HARBOR BAY PARKWAY**              | ** ** | ** **                           |
| **ALAMEDA, CALIFORNIA**                  | ** ** | **94502**                            |
| (Address of principal executive offices) |       | (zip code)                           |

 

Registrant’s telephone number, including areacode: **(510) 864-8800**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  Yes o      Noo

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

| Large accelerated filer x                |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o No x

 

As of July 30,2009 there were 128,457,570 shares of the registrant’s common stockoutstanding, par value $0.00125.

 

 

 

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**TABLEOF CONTENTS**

 
| PART I—FINANCIAL  INFORMATION                                                                  | 3  |
|----------------------------------------------------------------------------------------------------------|----|
| ITEM 1—CONDENSED  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                     | 3  |
| ITEM  2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS | 28 |
| ITEM  3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                                 | 47 |
| ITEM 4—CONTROLS AND PROCEDURES                                                                      | 48 |
| PART II—OTHER  INFORMATION                                                                     | 51 |
| ITEM  1—LEGAL PROCEEDINGS                                                                           | 51 |
| ITEM  1A—RISK FACTORS                                                                               | 51 |
| ITEM  2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                 | 51 |
| ITEM  3—DEFAULTS UPON SENIOR SECURITIES                                                             | 51 |
| ITEM  4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         | 51 |
| ITEM 5—OTHER  INFORMATION                                                                           | 52 |
| ITEM 6—EXHIBITS                                                                                     | 52 |
| SIGNATURES                                                                                               | 53 |

 

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**PART I—FINANCIAL INFORMATION**

 

**ITEM1—CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**UTSTARCOM, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)**

 
| ** **                                                                                                                                                                             | ** ** | **June 30,**                     | ** **      | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|-----------------|-----------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **2009**                              | ** **      | **2008**              | ** ** |
| ** **                                                                                                                                                                             | ** ** | **(In thousands, except par  value)** | ** **      |
| **ASSETS**                                                                                                                                                                             |       |                                  |            |                  |       |
| Current  assets:                                                                                                                                                                       | ** ** | ** **                            | ** **      | ** **            | ** ** |
| Cash  and cash equivalents                                                                                                                                                             |       | $                                     |  272,596   |                  | $          |  309,603 |   |
| Short-term  investments                                                                                                                                                                |       | 3,448                                 |            | 4,262                 |       |
| Accounts  receivable, net of allowances for doubtful accounts of $33,007 and $37,359,  respectively                                                                                    |       | 59,084                                |            | 149,210               |       |
| Accounts  receivable, related parties                                                                                                                                                  |       | 5,572                                 |            | 9,166                 |       |
| Notes  receivable                                                                                                                                                                      |       | 2,436                                 |            | 11,120                |       |
| Inventories                                                                                                                                                                            |       | 187,600                               |            | 189,832               |       |
| Deferred  costs                                                                                                                                                                        |       | 102,895                               |            | 114,884               |       |
| Prepaids  and other current assets                                                                                                                                                     |       | 76,444                                |            | 127,675               |       |
| Short-term  restricted cash                                                                                                                                                            |       | 15,112                                |            | 16,840                |       |
| Total  current assets                                                                                                                                                                  |       | 725,187                               |            | 932,592               |       |
| Property,  plant and equipment, net                                                                                                                                                    |       | 169,264                               |            | 175,287               |       |
| Long-term  investments                                                                                                                                                                 |       | 12,404                                |            | 17,691                |       |
| Long-term  deferred costs                                                                                                                                                              |       | 135,540                               |            | 149,258               |       |
| Long-term  deferred tax assets                                                                                                                                                         |       | 11,601                                |            | 13,464                |       |
| Other  long-term assets                                                                                                                                                                |       | 26,208                                |            | 22,514                |       |
| Total  assets                                                                                                                                                                          |       | $                                     |  1,080,204 |                  | $          |  1,310,806 |   |
| **LIABILITIES AND EQUITY**                                                                                                                                                             | ** ** | ** **                            | ** **      | ** **            | ** ** |
| Current  liabilities:                                                                                                                                                                  |       |                                  |            |                  |       |
| Accounts  payable                                                                                                                                                                      |       | $                                     |  58,096    |                  | $          |  176,384 |   |
| Income  taxes payable                                                                                                                                                                  |       | 11,862                                |            | 7,162                 |       |
| Customer  advances                                                                                                                                                                     |       | 179,901                               |            | 144,700               |       |
| Deferred  revenue                                                                                                                                                                      |       | 110,200                               |            | 117,584               |       |
| Deferred  tax liabilities                                                                                                                                                              |       | 11,644                                |            | 11,644                |       |
| Other  current liabilities                                                                                                                                                             |       | 179,934                               |            | 163,046               |       |
| Total  current liabilities                                                                                                                                                             |       | 551,637                               |            | 620,520               |       |
| Long-term  deferred revenue                                                                                                                                                            |       | 195,896                               |            | 210,050               |       |
| Other  long-term liabilities                                                                                                                                                           |       | 8,742                                 |            | 12,594                |       |
| Total  liabilities                                                                                                                                                                     |       | 756,275                               |            | 843,164               |       |
| Commitments  and contingencies (Note 10)                                                                                                                                          |       |                                  |            |                  |       |
| UTStarcom, Inc.  stockholders’ equity:                                                                                                                                       |       |                                  |            |                  |       |
| Common  stock: $0.00125 par value; 750,000 authorized shares; 128,458  and 126,566 shares issued and outstanding  at June 30, 2009 and  December 31, 2008, respectively |       | 152                                   |            | 152                   |       |
| Additional  paid-in capital                                                                                                                                                            |       | 1,245,864                             |            | 1,239,074             |       |
| Accumulated  deficit                                                                                                                                                                   |       | (993,202                              | )               | (841,486              | )          |
| Accumulated  other comprehensive income                                                                                                                                                |       | 70,324                                |            | 69,094                |       |
| Total  UTStarcom, Inc. stockholders’ equity                                                                                                                                  |       | 323,138                               |            | 466,834               |       |
| Noncontrolling  interests                                                                                                                                                              |       | 791                                   |            | 808                   |       |
| Total  equity                                                                                                                                                                          |       | 323,929                               |            | 467,642               |       |
| Total  liabilities and equity                                                                                                                                                          |       | $                                     |  1,080,204 |                  | $          |  1,310,806 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**UTSTARCOM, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

 
| ** **                                                                  | ** ** | **Three months ended June 30,**       | ** **    | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|---------------|------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                                   | ** **    | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                  | ** ** | **(in  thousands, except per share data)** | ** **    |
| Net sales                                                                   |       |                                       |          |                               |       |   |   |   |   |
| Third party                                                                 |       | $                                          |  75,130  |                               | $          |  623,388 |   | $ |  188,305 |   | $ |  1,197,583 |   |
| Related party                                                               |       | 5,033                                      |          | 9,368                              |       | 11,198 |   | 21,162 |   |
|                                                                        |       | 80,163                                     |          | 632,756                            |       | 199,503 |   | 1,218,745 |   |
| Cost of net sales                                                           |       |                                       |          |                               |       |   |   |   |   |
| Third party                                                                 |       | 93,160                                     |          | 544,523                            |       | 186,931 |   | 1,031,676 |   |
| Related party                                                               |       | 2,841                                      |          | 6,285                              |       | 6,758 |   | 13,042 |   |
| Gross (loss) profit                                                         |       | (15,838                                    | )             | 81,948                             |       | 5,814 |   | 174,027 |   |
| Operating expenses:                                                         |       |                                       |          |                               |       |   |   |   |   |
| Selling, general and  administrative                                        |       | 26,971                                     |          | 72,010                             |       | 81,151 |   | 151,754 |   |
| Research and  development                                                   |       | 16,229                                     |          | 39,286                             |       | 37,737 |   | 80,686 |   |
| Amortization of  intangible assets                                          |       | —                                     |          | 1,730                              |       | — |   | 3,554 |   |
| Restructuring                                                               |       | 27,757                                     |          | —                             |       | 32,576 |   | — |   |
| Gain on divestiture                                                         |       | (1,357                                     | )             | —                             |       | (1,357 | ) | — |   |
| Total net operating  expenses                                               |       | 69,600                                     |          | 113,026                            |       | 150,107 |   | 235,994 |   |
|                                                                        |       |                                       |          |                               |       |   |   |   |   |
| Operating loss                                                              |       | (85,438                                    | )             | (31,078                            | )          | (144,293 | ) | (61,967 | ) |
|                                                                        |       |                                       |          |                               |       |   |   |   |   |
| Interest income                                                             |       | 599                                        |          | 1,290                              |       | 1,348 |   | 4,107 |   |
| Interest expense                                                            |       | (230                                       | )             | (3,457                             | )          | (520 | ) | (9,528 | ) |
| Other income (expense),  net                                                |       | 5,429                                      |          | (920                               | )          | (1,785 | ) | 53,050 |   |
|                                                                        |       |                                       |          |                               |       |   |   |   |   |
| Loss before income  taxes                                                   |       | (79,640                                    | )             | (34,165                            | )          | (145,250 | ) | (14,338 | ) |
| Income tax (expense)  benefit                                               |       | (4,659                                     | )             | (4,625                             | )          | (6,483 | ) | 395 |   |
| Net loss                                                                    |       | (84,299                                    | )             | (38,790                            | )          | (151,733 | ) | (13,943 | ) |
| Net loss attributable  to noncontolling interests                           |       | 16                                         |          | 10                                 |       | 17 |   | 520 |   |
| Net loss attributable  to UTStarcom, Inc.                              |       | $                                          |  (84,283 | )                                  | $          |  (38,780 | ) | $ |  (151,716 | ) | $ |  (13,423 | ) |
|                                                                        |       |                                       |          |                               |       |   |   |   |   |
| Net loss per share  attributable to UTStarcom, Inc.- Basic and Diluted |       | $                                          |  (0.66   | )                                  | $          |  (0.31 | ) | $ |  (1.20 | ) | $ |  (0.11 | ) |
|                                                                        |       |                                       |          |                               |       |   |   |   |   |
| Weighted average shares  used in per-share calculation - Basic and Diluted  |       | 127,160                                    |          | 123,119                            |       | 126,450 |   | 122,608 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**UTSTARCOM, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)**

 
| ** **                                                                                                     | ** ** | **Six months ended June 30,** | ** **     |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------|----------------|
| ** **                                                                                                     | ** ** | **2009**                           | ** **     | **2008** | ** ** |
| ** **                                                                                                     | ** ** | **(In thousands)**                 | ** **     |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                         | ** ** | ** **                         | ** **     | ** ** | ** ** |
| Net loss                                                                                                       |       | $                                  |  (151,733 | ) | $ |  (13,943 | ) |
|                                                                                                           |       |                               |           |   |   |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities:                     |       |                               |           |   |   |
| Depreciation and  amortization                                                                                 |       | 6,918                              |           | 19,904 |   |
| Gain on divestiture,  sale of investments and liquidation of ownership interest in a variable  interest entity |       | (1,357                             | )              | (48,375 | ) |
| Other-than-temporary  impairment of equity investment                                                          |       | 3,798                              |           | — |   |
| Stock-based  compensation expense                                                                              |       | 6,427                              |           | 9,844 |   |
| (Recovery of) provision  for doubtful accounts                                                                 |       | (2,129                             | )              | 2,722 |   |
| (Recovery of) provision  for deferred costs                                                                    |       | (579                               | )              | 9,089 |   |
| Deferred income taxes                                                                                          |       | 1,752                              |           | (11,541 | ) |
| Other                                                                                                          |       | (503                               | )              | 2,620 |   |
| Changes in operating  assets and liabilities:                                                                  |       |                               |           |   |   |
| Accounts receivable                                                                                            |       | 96,273                             |           | 65,081 |   |
| Inventories and  deferred costs                                                                                |       | 30,603                             |           | (26,766 | ) |
| Other assets                                                                                                   |       | 61,086                             |           | (5,513 | ) |
| Accounts payable                                                                                               |       | (119,405                           | )              | 114,940 |   |
| Income taxes payable                                                                                           |       | 2,182                              |           | 3,800 |   |
| Customer advances                                                                                              |       | 33,606                             |           | (16,503 | ) |
| Deferred revenue                                                                                               |       | (21,133                            | )              | (7,025 | ) |
| Other liabilities                                                                                              |       | 17,058                             |           | (39,986 | ) |
| Net cash (used in)  provided by operating activities                                                           |       | (37,136                            | )              | 58,348 |   |
|                                                                                                           |       |                               |           |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                         |       |                               |           |   |   |
| Additions to property,  plant and equipment                                                                    |       | (1,337                             | )              | (10,271 | ) |
| Proceeds from the  disposition of (purchase of) an investment interest                                         |       | —                             |           | (2,244 | ) |
| Proceeds from repayment  of loan by a variable interest entity                                                 |       | —                             |           | 7,728 |   |
| Change in restricted  cash                                                                                     |       | 1,404                              |           | (6,506 | ) |
| Purchase of short-term  investments                                                                            |       | (5,613                             | )              | (8,567 | ) |
| Proceeds from sale of  short-term investments                                                                  |       | 6,421                              |           | 66,580 |   |
| Other                                                                                                          |       | 392                                |           | 143 |   |
| Net cash provided by  investing activities                                                                     |       | 1,267                              |           | 46,863 |   |
|                                                                                                           |       |                               |           |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                         |       |                               |           |   |   |
| Proceeds from  borrowings                                                                                      |       | —                             |           | 50,000 |   |
| Payments on borrowings                                                                                         |       | —                             |           | (346,017 | ) |
| Other                                                                                                          |       | (389                               | )              | (3,637 | ) |
| Net cash used in financing  activities                                                                         |       | (389                               | )              | (299,654 | ) |
| Effect of exchange rate  changes on cash and cash equivalents                                                  |       | (749                               | )              | 10,895 |   |
| Net decrease in cash  and cash equivalents                                                                     |       | (37,007                            | )              | (183,548 | ) |
| Cash and cash  equivalents at beginning of period                                                              |       | 309,603                            |           | 437,449 |   |
| Cash and cash  equivalents at end of period                                                                    |       | $                                  |  272,596  |   | $ |  253,901 |   |
|                                                                                                           |       |                               |           |   |   |
| Supplemental disclosure  of cash flow information:                                                             |       |                               |           |   |   |
| Non-cash operating  activity:                                                                                  |       |                               |           |   |   |
| Accounts receivable  transferred to notes receivable                                                           |       | $                                  |  1,932    |   | $ |  9,278 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**UTSTARCOM, INC.**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE1 - BASIS OF PRESENTATION AND LIQUIDITY**

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of UTStarcom, Inc. (“Company”) and its wholly and majority ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated in the preparation of the condensed consolidated financialstatements. Certain reclassifications have been made to prior period amounts toconform to current period presentation. Such reclassifications have no effect on net income as previouslyreported. The Company has evaluated subsequent events through August 7,2009, which is the date the financial statements were issued.

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared by the Company pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles in the United States (“GAAP”)have been condensed or omitted pursuant to such rules and regulations.These condensed consolidated financial statements should be read in conjunctionwith the Company’s December 31, 2008 financial statements, including thenotes thereto, and the other information set forth in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2008. Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the amounts of assets,liabilities, revenue, costs, expenses and gains and losses not affectingretained earnings that are reported in the consolidated financial statementsand accompanying disclosures.  Actualresults may be different.  See the Company’s2008 Annual Report for discussion of the Company’s critical accounting policiesand estimates.

 

In theopinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments (consisting of only normalrecurring adjustments) considered necessary for a fair statement of the Company’sfinancial condition, the results of its operations and its cash flows for theperiods indicated. The results of operations for the three and six months endedJune 30, 2009 are not necessarily indicative of the operating results forthe full year.

 

The accompanying condensed consolidated financial statements arepresented on the basis that the Company is a going concern. The going concernassumption contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business.

 

The Company incurred net losses of $150.3 million,$195.6 million and $117.3 million during the years ended December 31,2008, 2007 and 2006, respectively. During the six months ended June 30,2009, the Company recorded a net loss of $151.7 million. The Company recordedoperating losses in 17 of the 18 consecutive quarters in the period ended June 30,2009. At June 30, 2009, the Company had an accumulated deficit of$993.2 million. The Company incurred net cash outflows from operations of$55.2 million and $225.1 million in 2008 and 2007 respectively. Cashused in operations was $37.1 million during the six months ended June 30,2009.  At June 30, 2009, the Companyhad cash and cash equivalents of $272.6 million in the aggregate to meet theCompany’s liquidity requirements of which $122.9 million was held by itssubsidiaries in China. China imposes currency exchange controls on transfers offunds from/to China.  Going forward, theamount of cash available for transfer from the China subsidiaries for use by theCompany’s non-China subsidiaries is limited both by the liquidity needs of thesubsidiaries in China and by Chinese-government mandated limitations includingcurrency exchange controls on transfers of funds outside of China.Management expects the Company to continue to incur losses and negative cashflows from operations over at least the remainder of 2009.

 

The Company’s only committed sources for borrowings are its creditfacilities in China. Each borrowing under these facilities is subject to thebanks’ then current favorable opinion of the credit worthiness of the Company’sChina subsidiaries, the banks having funds available for lending, and otherChinese banking regulations and practices. As a result, management cannot becertain that borrowings under these facilities will be adequate, if availableat all, to meet the Company’s liquidity requirements. In addition, these creditfacilities expire in the second half of 2009. Upon expiration of thesefacilities, management is not certain that new credit facilities will beavailable on commercially reasonable terms or at all. Even if these facilitiesare renewed upon expiration, based on the Company’s recent financialperformance, the total available credit may be reduced. Accordingly, managementis not certain that borrowings under the Company’s credit facilities in Chinawill be adequate to meet the Company’s financing requirements.

 

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In 2009 and 2008, the Company took a number of actions to improve itsliquidity, including divesting the Company’s non-core businesses. In December 2008,management announced initiatives including efforts to eliminate functional duplicationsby consolidation of a number of functions into the Company’s China operations. In June 2009, management expandedthe initiatives to include a worldwide reduction in workforce, outsourcing ofmanufacturing operations and optimizing research and development spending witha focus on selected products. Management believes thatthese initiatives, if executed successfully, will help achieve significantoperating expense reductions by the fourth quarter of 2009 and enable theCompany’s fixed cost base to be better aligned with operations, market demandand projected sales levels. If the level of sales anticipated by the Company’sfinancial plan does not materialize, the Company will need to take furtheractions to reduce costs and expenses or explore other cost reduction options.

 

Management believes that if the Company is able to achieve projectedsales levels in 2009 and contain expenses and cash used in operations to levelscontemplated in the Company’s 2009 financial plan, both the Company’s China andnon-China operations will have sufficient liquidity to finance working capitaland capital expenditure needs during the next 12 months. If the Company isnot able to execute its 2009 financial plan successfully, the Company may needto obtain funds from equity or debt financings. There can be no assurance thatadditional financing, if required, will be available on terms satisfactory tothe Company or at all, and if funds are raised in the future through issuanceof preferred stock or debt, these securities could have rights, privileges orpreference senior to those of the Company’s common stock and newly issued debtcould contain debt covenants that impose restrictions on the Company’soperations. Further, any sale of newly issued debt or equity securities couldresult in additional dilution to the Company’s current shareholders.

 

Recently, global economies have experienced a significant downturndriven by a financial and credit crisis that will continue to challenge sucheconomies for some period of time. Under the current macroeconomic environmentthere are significant risks and uncertainties inherent in management’s abilityto forecast future results. The operating environment confronting the Company,both internally and externally, raises significant uncertainties. Whileimprovements in the Company’s operating results, cash flows and liquidity areanticipated as the Company’s 2009 financial plan and management’s initiativesto control and reduce costs while maintaining and growing the Company’s revenuebase are fully implemented, the Company’s recurring losses and expectednegative cash flows from operations raise substantial doubt about the Company’sability to continue as a going concern. The condensed consolidated financialstatements do not include any adjustments relating to the recoverability andclassification of recorded assets amounts or the amounts and classification ofliabilities or any other adjustments that may be necessary if the entity isunable to continue as a going concern.

 

**NOTE****2 -RECENT ACCOUNTING PRONOUNCEMENTS**

 

***During the first quarter of fiscalyear 2009, the Company adopted the following accounting standards:***

 

On January 1, 2009,the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 141(revised), “Business Combinations” (“SFAS 141(R)”). The standard changesthe accounting for business combinations including the measurement of acquirershares issued in consideration for a business combination, the recognition ofcontingent consideration, the accounting for preacquisition gain and losscontingencies, the recognition of capitalized in-process research anddevelopment, the accounting for acquisition-related restructuring costaccruals, the treatment of acquisition related transaction costs and therecognition of changes in the acquirer’s income tax valuation allowance.SFAS 141(R) applies prospectively to business combinations for whichthe acquisition date is on or after January 1, 2009. The Company didnot consummate any business combination transactions during the six monthsended June 30, 2009.

 

On January 1, 2009,the Company adopted FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”(“SFAS 161”), which amends and expands the disclosure requirements of FASBStatement No. 133, “Accountingfor Derivative Instruments and Hedging Activities”  (“SFAS 133”), with the intent to provideusers of financial statements with an enhanced understanding of:  (a) howand why an entity uses derivative instruments; (b) how derivative instrumentsand related hedged items are accounted for under SFAS 133 and its relatedinterpretations; and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance and cashflows.  SFAS 161 requires qualitative disclosures about objectivesand strategies for using derivatives, quantitative disclosures about fair valueamounts of and gains and losses on derivative instruments and disclosures aboutcredit-risk-related contingent features in derivative instruments.  Thisstatement applies to all entities and all derivative instruments.  Therewas no impact on the Company’s financial position or results of operations uponadoption of SFAS 161.

 

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On January 1, 2009,the Company adopted FASB Staff Position (“FSP”) EITF 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides thatunvested share-based payment awards that contain non-forfeitable rights todividends or dividend equivalents (whether paid or unpaid) are participatingsecurities and shall be included in the computation of earnings per sharepursuant to the two-class method. There was no material impact on the Company’sconsolidated financial statements upon adoption of FSP EITF 03-6-1.

 

In December 2007, the FASB issued Statement No. 160, “NoncontrollingInterests in Consolidated Financial Statements, an amendment of ARB No. 51”(“SFAS 160”). The standard changes the accounting for noncontrolling(minority) interests in consolidated financial statements including therequirements to classify noncontrolling interests as a component ofconsolidated stockholders’ equity, and the elimination of “minority interest”accounting in results of operations with earnings attributable tonon-controlling interests reported as part of consolidated earnings.Previously, noncontrolling interests were recorded within “mezzanine” (ortemporary) equity. Additionally, SFAS 160 revises the accounting for bothincreases and decreases in a parent’s controlling ownership interest. TheCompany’s adoption of SFAS 160, effective January 1, 2009, resultedin a $0.8 million reclassification of noncontrolling minority interests toshareholders’ equity on the condensed consolidated balance sheet as of December 31,2008.  Minority interest in losses ofconsolidated subsidiaries of $0.5 million for the six months ended June 30,2008 have been reclassified to net income attributable to noncontrollinginterests on the condensed consolidated statement of operations to conform tothe presentation requirements of SFAS 160. See Note 5, Comprehensive Loss, foradditional SFAS 160 disclosures regarding the noncontrolling interestcomponents of comprehensive loss.

 

InSeptember 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS 157”). SFAS 157 defines fair value, establishesa framework for measuring fair value in generally accepted accountingprinciples, and expands disclosures about fair value measurements. Theprovisions of this standard apply to current accounting pronouncements thatrequire or permit fair value measurements. Upon adoption, the provisions ofSFAS 157 are to be applied prospectively with limited exceptions.Effective January 1, 2008, the Company adopted the measurement anddisclosure requirements of SFAS 157 as it relates to financial assets andfinancial liabilities measured at fair value on a recurring basis. In February 2008,the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASBStatement No. 157” (“FSP 157-2”), which delayed the effective date ofSFAS 157 for non-financial assets and non-financial liabilities exceptthose recorded or disclosed at fair value on a recurring basis. Effective January 1,2009, the Company adopted the measurement and disclosure requirements ofSFAS 157 as it relates to non-financial assets and non-financialliabilities measured at fair value on a non-recurring basis. Examples include goodwill,intangibles, and other long-lived assets.The adoption of SFAS No. 157for non-financial assets and non-financial liabilities did not have a materialimpact on the Company’s financial condition or results of operations. Theadditional disclosures required by SFAS 157 are included in Note 7.

 

***During the second quarter of fiscalyear 2009, the Company adopted the following accounting standards:***

 

In April 2009, theFASB issued three FSPs that are intended to provide additional applicationguidance and enhance disclosures about fair value measurements and impairmentsof securities. FSP FAS 157-4, “Determining Whether a Market is Not Active and aTransaction Is Not Distressed”, provides guidance on determining fair valuewhen there is no active market or where the price inputs being used representdistressed sales. FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation ofOther-Than-Temporary Impairments”, changes the method for determining when another-than-temporary impairment exists for debt securities and the amount ofthe impairment to be recorded in earnings. FSP FAS 107-1 and APB 28-1, “InterimDisclosures About Fair Value of Financial Instruments”, requires fair valuedisclosures in both interim as well as annual financial statements in order toprovide more timely information about the effects of current market conditionson financial instruments. Effective April 1, 2009, the Company adoptedthese three accounting standards. There was no material impact on the Company’sconsolidated financial statements upon adoption of FSP FAS 157-4, FSP FAS 115-2and FAS 124-2, and FSP FAS 107-1 and APB 28-1.

 

In May 2009, theFASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165establishes the standards for accounting for and disclosure of events thatoccur after the balance sheet date, but before the financial statements areissued or are available to be issued. The statement sets forth thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements. Thestatement also identifies the disclosures that an entity should make aboutevents or transactions that occurred after the balance sheet date. Effective April 1,2009, the Company adopted SFAS 165. The adoption ofSFAS 165 did not have a material impact on the Company’s financialcondition or results of operations. The additional disclosures required bySFAS 165 are included in Note 1.

 

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***Recent Accounting Pronouncements Not Yet Adopted***

 

In June 2009, the FASB issued Statement No. 166, “Accounting for Transfers ofFinancial Assets—an amendment of FASB Statement No. 140” (“SFAS 166”).SFAS 166 eliminates the concept of a qualifying special-purpose entity,creates more stringent conditions for reporting a transfer of a portion of afinancial asset as a sale, clarifies other sale-accounting criteria, andchanges the initial measurement of a transferor’s interest in transferredfinancial assets. SFAS 166 will be effective for transfers of financialassets in annual reporting periods beginning after November 15, 2009, andin interim periods within those first annual reporting periods with earlieradoption prohibited. SFAS 166 will be applicable to the Company in thefirst quarter of fiscal year 2010. The Company is assessing the potentialimpact, if any, of the adoption of SFAS 166 on its consolidated results ofoperations and financial condition.

 

In June 2009, the FASB issued Statement No. 167, “Amendments to FASBInterpretation No. 46(R)” (“SFAS 167”). SFAS 167 amends FIN 46(R), “Consolidationof Variable Interest Entities (revised December 2003)—an interpretation ofARB No. 51” (“FIN 46(R)”) to require an enterprise to perform an analysisto determine whether the enterprise’s variable interest or interests give it acontrolling financial interest in a variable interest entity. This analysisidentifies the primary beneficiary of a variable interest entity as one withthe power to direct the activities of a variable interest entity that mostsignificantly impact the entity’s economic performance and the obligation toabsorb losses of the entity that could potentially be significant to thevariable interest. SFAS 167 will be effective as of the beginning of theannual reporting period commencing after November 15, 2009 and will beadopted by the Company in the first quarter of fiscal year 2010. The Company isassessing the potential impact, if any, of the adoption of SFAS 167 on itsconsolidated results of operations and financial condition.

 

InJune 2009, the FASB issued Statement No. 168,**The“FASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles — a Replacement of FASB Statement No. 162” (“SFAS168”). This standard establishes only two levels of GAAP, authoritativeand nonauthoritative. The FASB Accounting Standards Codification (the “Codification”)will become the source of authoritative, nongovernmental GAAP, except for rules andinterpretive releases of the SEC, which are sources of authoritative GAAP forSEC registrants. All other nongrandfathered, non-SEC accounting literature notincluded in the Codification will become nonauthoritative. This standard iseffective for financial statements for interim or annual reporting periodsending after September 15, 2009.  The Company will begin to use thenew guidelines and numbering system prescribed by the Codification whenreferring to GAAP in the third quarter of fiscal year 2009.  As theCodification was not intended to change or alter existing GAAP, it will nothave any impact on its consolidated financial statements.

 

**NOTE 3—DIVESTITURES**

 

*UTStarcom Personal Communications LLC (PCD)*

 

On July 1, 2008, the Company completed the sale of UTStarcomPersonal Communications LLC, a wholly-owned subsidiary of the Company (“PCD”),to Personal Communications Devices, LLC (“PCD LLC”). The Company alsoinvested $1.6 million in equity securities representing approximately a2.6% interest in PCD LLC. The Company recorded a $3.8 million gain onsale of PCD net assets during 2008. In the second quarter of 2009, the Companyrecorded an additional $1.4 million gain resulting from an adjustment toreflect actual transaction-related costs. The total gain on sale of PCD netassets includes proceeds of $10.0 million held in escrow which were disbursedto the Company in July 2009. Pursuant to the original terms of thedivestiture agreement, the Company was potentially entitled to receive up to a$50 million earnout payment in 2011 based on the achievement of cumulativeearnings levels of PCD LLC through December 31, 2010.

 

Prior to June 30,2008, PCD was a reportable segment of the Company. Concurrent with theclosing of the divestiture transaction, the Company entered into a three-yearsupply agreement with PCD LLC whereby the Company indicated its intent tosupply handset products to PCD LLC. In connection with the wind down ofour Korea operations, in December 2008, we furnished PCD LLC with 180-day’snotice of termination of the supply agreement. Due to the continuing directcash flows pursuant to the supply agreement beyond the one-year assessmentperiod, starting from the date of sale, the sale of the PCD assets did not meetthe criteria for presentation as a discontinued operation under SFAS 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”.

 

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OnJune 30, 2009, the Company entered into a Settlement Agreement and Release(the “Settlement Agreement”) with PCD LLC. Under the Settlement Agreement, the Companywaived its right to any earnout payments and granted a call option to PCD LLCfor the Company’s $1.6 million investment in the equity securities of PCDLLC.  The Company also agreed to pay PCDLLC a total of $11.1 million which included warranty costs of approximately$8.4 million (see Note 8) and a reduction of revenue of approximately $2.7million. In addition to the $11.1 million claim settlement, the Companyrecorded an additional$17.6 million of costs for inventory write-downs to net realizable value,write-downs of excess inventory and warranty reserves related to transactionswith PCD LLC. The Company recorded these transactions in the second quarter of2009, resulting in a decrease in revenue of approximately $2.7 million and an increasein cost of net sales of $26.0 million.

 

*Sale of Assets to Marvell Technology Group Ltd:*

 

In February 2006, the Company sold substantially all of the assetsand selected liabilities of its semiconductor design business division toMarvell Technology Group Ltd. (“Marvell”). In connection with the sale ofassets, the Company entered into a supply agreement with Marvell to purchasechipsets for the Company’s handset products over the next five years. The valueallocated to the supply agreement of $20.2 million has been amortized inproportion to the quantities of chipsets purchased under the supply agreement.For the six months ended June 30, 2009 and 2008, approximately$8.5 million and $4.3 million, respectively, have been amortizedagainst cost of sales. During the first quarter of 2009, the Companyrevised its estimates of customer demand for certain handset products anddetermined that future chipset purchases from Marvell would be negligible. As aresult, the Company fully amortized the remaining value of the supply agreementof $8.5 million in the first quarter of 2009.

 

**NOTE****4 - EARNINGS (LOSS) PERSHARE**

 

Basic earnings per share(“EPS”) is computed by dividing net income (loss) available to commonstockholders by the weighted average number of shares of the Company’s commonstock outstanding during the period, which excludes nonvested restricted stock.Diluted EPS presents the amount of net income (loss) available to each share ofcommon stock outstanding during the period plus each share of common stock thatwould have been outstanding assuming the Company had issued shares of commonstock for all dilutive potential common shares outstanding during the period.The Company’s potentially dilutive common shares include outstanding stockoptions, nonvested restricted stock and restricted stock units, convertiblesubordinated notes prior to their maturity on March 1, 2008, and EmployeeStock Purchase Plan (“ESPP”) shares prior to termination of the ESPP effective May 15,2009.

 

The following is asummary of the calculation of basic and diluted EPS:

 
| ** **                                                                   | ** ** | **Three months ended June 30,**     | ** **    | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------|---------------|------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                                 | ** **    | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                   | ** ** | **(in thousands except per share data)** | ** **    |
|                                                                         |       |                                     |          |                               |       |   |   |   |   |
| **Numerator:**                                                               |       |                                     |          |                               |       |   |   |   |   |
| Net loss attributable  to UTStarcom, Inc.                               |       | $                                        |  (84,283 | )                                  | $          |  (38,780 | ) | $ | (151,716 | ) | $ |  (13,423 | ) |
|                                                                         |       |                                     |          |                               |       |   |   |   |   |
| **Denominator:**                                                             |       |                                     |          |                               |       |   |   |   |   |
| Weighted-average shares  outstanding                                         |       | 127,160                                  |          | 123,119                            |       | 126,450 |   | 122,608 |   |
|                                                                         |       |                                     |          |                               |       |   |   |   |   |
| Net loss per share  attributable to UTStarcom, Inc. - basic and diluted |       | $                                        |  (0.66   | )                                  | $          |  (0.31 | ) | $ |  (1.20 | ) | $ |  (0.11 | ) |

 

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For the three and sixmonths ended June 30, 2009 and 2008, no potential common shares weredilutive because of the net loss in each of these periods. The following tablesummarizes the total potential shares of common stock that were excluded fromthe diluted per share calculation:

 
| ** **                                             | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                             | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                   | ** ** |
| Weighted average stock  options and awards outstanding |       | 13,462                               |       | 26,111                             |       | 14,138 |   | 25,453 |   |
| Conversion of  convertible subordinated notes          |       | —                               |       | —                             |       | — |   | 3,805 |   |
| Other                                                  |       | 129                                  |       | 900                                |       | 219 |   | 634 |   |
|                                                   |       | 13,591                               |       | 27,011                             |       | 14,357 |   | 29,892 |   |

 

**NOTE 5 -COMPREHENSIVE LOSS**

 

Total comprehensive lossfor the three and six months ended June 30, 2009 and 2008 consisted of thefollowing:

 
| ** **                                                                                          | ** ** | **Three months ended June 30,** | ** **    | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------|---------------|------------------------------------|------------|
| ** **                                                                                          | ** ** | **2009**                             | ** **    | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands)**                   | ** **    |
| ** **                                                                                          | ** ** | ** **                           | ** **    | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                            |       | $                                    |  (84,299 | )                                  | $          |  (38,790 | ) | $ |  (151,733 | ) | $ |  (13,943 | ) |
| Unrealized loss on  investments, net of tax                                                         |       | —                               |          | (273                               | )          | — |   | (1,723 | ) |
| Reclassification for  realization of previously unrealized (gains) losses, net of tax               |       | 4,011                                |          | —                             |       | 3,313 |   | (36,924 | ) |
| Reclassification for  realization of previously unrealized foreign currency translation, net of tax |       | —                               |          | —                             |       | — |   | (1,378 | ) |
| Foreign currency  translation                                                                       |       | (2,657                               | )             | 4,507                              |       | (2,084 | ) | 12,271 |   |
|                                                                                                |       | (82,945                              | )             | (34,556                            | )          | (150,504 | ) | (41,697 | ) |
|                                                                                                |       |                                 |          |                               |       |   |   |   |   |
| Comprehensive loss attributable  to noncontrolling interests (1)                                    |       | (16                                  | )             | (10                                | )          | (17 | ) | (520 | ) |
| Comprehensive loss  attributable to UTStarcom, Inc.                                            |       | $                                    |  (82,929 | )                                  | $          |  (34,546 | ) | $ |  (150,487 | ) | $ |  (41,177 | ) |

 

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(1)          Comprehensive loss attributable tononcontrolling interests consisted primarily of net loss.

 

The changes innoncontrolling interests during the six months ended June 30, 2009 were asfollows:

 
| ** **                                                   | ** ** | **Six months  ended June 30,  2009** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                   | ** ** | **(in thousands)**                        | ** ** |
| Balance at January 1, 2009                              |       | $                                         | 808        |   |
| Comprehensive loss attributable to noncontrolling  interests |       | (17                                       | )          |
| Balance at June 30, 2009                                |       | $                                         | 791        |   |

 

**NOTE****6 — BALANCE SHEETDETAILS**

 

As of June 30, 2009and December 31, 2008, total inventories consisted of the following:

 

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| ** **          | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|---------------------|------------|--------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **          | ** ** | **(in thousands)** | ** ** |
| **Inventories:**    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Raw  materials      |       | $                  | 12,560     |                  | $          | 15,545 |   |
| Work  in process    |       | 17,019             |       | 33,524                |       |
| Finished  goods (1) |       | 158,021            |       | 140,763               |       |
| Total               |       | $                  | 187,600    |                  | $          | 189,832 |   |

 

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(1) Includes finished goods at customer sites of approximately$149.2 million and $138.0 million at June 30, 2009 and December 31,2008, respectively, for which the customer has taken possession, but based onspecific contractual terms, title has not yet passed to the customer.

 

**NOTE 7 - CASH, CASH EQUIVALENTS, INVESTMENTS AND FAIR VALUEMEASUREMENTS**

 

Cash and cash equivalents, consistingprimarily of bank deposits and money market funds, are recorded at cost whichapproximates fair value because of the short-term nature of these instruments.There were no available-for-sale securities investments included in cash andcash equivalents at June 30, 2009 or December 31, 2008. Short-terminvestments, consisting of bank notes, were $3.4 million and$4.3 million at June 30, 2009 and December 31, 2008,respectively.  During the six monthsended June 30, 2008, the Company sold investments with a carrying value of$42.4 million and recognized gains of $39.7 million in other income, net.

 

AtJune 30, 2009 and December 31, 2008, MRV Communications (“MRV”) isthe only available-for-sale security investment recorded at fair value (seeadditional discussion below), all other long-term investments are inprivately-held companies and are accounted for under the cost method.  Any unrealized holding gains or losses arereported as a component of other comprehensive income, net of related incometax effects.  Realized gains and lossesare reported in earnings.  At June 30,2009 and December 31, 2008, the long-term investments included$0 million and $3.3 million of unrealized holding loss related to MRVwhich was recorded in accumulated other comprehensive income, respectively.There was no unrealized holding gain or loss in short-term investments.

 

TheCompany accepts bank notes receivable with maturity dates of between three andsix months from its customers in China in the normal course of business.  The Company may discount these bank noteswith banking institutions in China. During the three months ended June 30,2009, there were no bank notes sold. During the three months ended June 30, 2008, the Company sold $7.7million of bank notes and recorded costs of approximately $0.1 million as aresult of discounting the notes.  Duringthe six months ended June 30, 2009 and 2008, the Company sold $9.9 millionand $30.5 million of bank notes, respectively, and recorded costs of less than$0.1 million and $0.4 million, respectively, as a result of discounting thenotes.

 

The following table showsthe break-down of the Company’s equity securities classified as long-terminvestments at June 30, 2009 and December 31, 2008:

 
| ** **                   | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                   | ** ** | **(in thousands)** | ** ** |
|                         |       |               |       |                  |       |
| TET                          |       | $                  | —     |                  | $          | 4,800 |   |
| Cortina                      |       | 3,348              |       | 3,348                 |       |
| MRV                          |       | 684                |       | 1,170                 |       |
| GCT SemiConductor, Inc. |       | 3,000              |       | 3,000                 |       |
| Xalted Networks              |       | 3,302              |       | 3,302                 |       |
| PCD LLC                      |       | 1,600              |       | 1,600                 |       |
| Other                        |       | 470                |       | 471                   |       |
| Total equity securities      |       | $                  | 12,404     |                  | $          | 17,691 |   |

 

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*TET*

 

In October 2008, the Company invested$4.8 million into Turnstone Environment Technologies LLC (“TET”), inexchange for approximately 22% of voting interest. The Company is not obligatedto make further capital contributions. TET’s mission is to secure the licensingrights to environmentally friendly, renewable energy technologies fordistribution to various emerging markets, with an initial focus on India. TETis considered as a variable interest entity where the Company is the primarybeneficiary and does not hold a majority voting interest. The assets,liabilities and operating results of TET were determined to be immaterial as ofDecember 31, 2008 and, therefore, were not consolidated.  As of and for the three and six months ended June 30,2009, the financial statements of TET were included in the consolidated balancesheet and the statement of operations of the Company (see Note 17).

 

*MRV*

 

On July 1, 2007, Fiberxon, an investment in which the Company hada 7% ownership interest, completed a merger with MRV, which is apublicly-traded company in an active market. In exchange for the Company’sinterest in Fiberxon, the Company was entitled to receive $1.5 million incash, 1,519,365 shares of MRV common stock valued at approximately$4.5 million and deferred consideration of approximately$2.7 million. The deferred consideration becomes payable upon thecompletion of certain milestones and may be reduced by legitimate claims of MRVfor certain matters related to the merger. In the third quarter of 2007, theCompany was paid the cash consideration of $1.5 million, received1,519,365 shares of MRV common stock and recognized a gain on investment of$2.9 million.

 

Duringthe second quarter of 2009, the trading of MRV common stock on theNASDAQ Stock Market was suspended as a result of MRV’s failure to file itsdelinquent periodic reports with the SEC after numerous extensions granted bythe staff of the Nasdaq Stock Market.  Asa result of the delisting from the NASDAQ Stock Market, management re-evaluatedthe carrying value of this investment, including reviewing MRV’s cash position,recent financing activities, financing needs, earnings/revenue outlook,operational performance, and competition. Based on this review andconsideration of the duration and extent of the decline in MRV fair value, theCompany determined that the decline in MRV fair value was other-than-temporaryand recorded a $3.8 million impairment charge for this investment in otherincome (expense), net in the second quarter of 2009. At both June 30, 2009 and December 31,2008, MRV is the only investment accounted for under SFAS 115, “Accounting forCertain Investments in Debt and Equity Securities.”

 

*PCD*

 

In connection with the divestiture of PCD,the Company invested $1.6 million in shares of common stock representingapproximately a 2.6% ownership interest of PCD LLC.  Under the Settlement Agreement dated June 30,2009, the Company granted PCD LLC an option to repurchase the Company’s currentequity position in PCD LLC within 90 days of the date of the SettlementAgreement at its original investment cost of $1.6 million.

 

**Fair Value Measurements**

 

SFAS No. 157clarifies that fair value is an exit price, representing the amount that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants. As such, fair value is amarket-based measurement that should be determined based on assumptions thatmarket participants would use in pricing an asset or liability. As a basisfor considering such assumptions, SFAS No. 157 establishes a three-tiervalue hierarchy, which prioritizes the inputs used in measuring fair value asfollows: (Level 1) observable inputs such as quoted prices in active markets;(Level 2) inputs other than the quoted prices in active markets that areobservable either directly or indirectly; and (Level 3) unobservable inputs inwhich there is little or no market data, which require us to develop our ownassumptions. This hierarchy requires the Company to use observable market data,when available, and to minimize the use of unobservable inputs when determiningfair value. On a recurring basis, the Company measures certain financial assetsat fair value, including its marketable securities.

 

At June 30, 2009, the Company’s investment in MRV, which iscurrently listed in an over-the-counter exchange, is recorded at fair value,classified within Level 1 of the fair value hierarchy and its money marketfunds are recorded at cost which approximates fair value, classified withinLevel 1 of the fair value hierarchy. The Company has no other financial assets or liabilities that are beingmeasured at fair value at June 30, 2009.

 

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**NOTE 8 - WARRANTY OBLIGATIONS AND OTHER GUARANTEES**

 

The Company provides a warranty on its equipment and handset sales fora period generally ranging from one to two years from the time of finalacceptance. At times, the Company has entered into arrangements to providelimited warranty services for periods longer than two years. The Companyprovides for the expected cost of product warranties at the time that revenueis recognized based on an assessment of past warranty experience and whenspecific circumstances dictate. The Company assesses the adequacy of itsrecorded warranty liability every quarter and makes adjustments to theliabilities if necessary. From time to time, the Company may be subject toadditional costs related to non-standard warranty claims from its customers. Ifand when this occurs, the Company estimates additional accruals based onhistorical experience, communication with its customers and various assumptionsthat the Company believes to be reasonable under the circumstances. Suchadditional warranty accruals are recorded in the period in which the additionalcosts are identified.

 

Thefollowing table summarizes the activity related to warranty obligations duringthe three and six months ended June 30, 2009 and 2008:

 
| ** **                                                                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                   | ** ** |
| Balance  at beginning of period                                                |       | $                                    | 29,814     |                               | $          | 49,572 |   | $ | 29,840 |   | $ | 52,734 |   |
| Accruals  for warranties issued during the period                              |       | 7,251                                |       | 4,354                              |       | 10,833 |   | 11,587 |   |
| Settlements  made during the period                                            |       | (3,241                               | )          | (8,222                             | )          | (6,849 | ) | (18,617 | ) |
| Warranty  obligations related to PCD reclassified to liabilities held for sale |       | —                               |       | (10,124                            | )          | — |   | (10,124 | ) |
| Balance  at end of period                                                      |       | $                                    | 33,824     |                               | $          | 35,580 |   | $ | 33,824 |   | $ | 35,580 |   |

 

During the second quarter of 2009, theCompany recorded a special warranty charge related to certain handsets soldto PCD LLC.  Under the SettlementAgreement with PCD LLC (see Note 3), the Company agreed to pay PCD LLC $8.4million to settle certain PCD LLC customers’ warranty claims arising from thehandsets sold to PCD LLC.  The $8.4million claim settlement is included in the accruals for warranties issuedduring the three and six months ended June 30, 2009 in the table above.

 

Certainof the Company’s sales contracts include provisions under which customers wouldbe indemnified by the Company in the event of, among other things, athird-party claim against the customer for intellectual property rightsinfringement related to the Company’s products. There are no limitations on the maximum potential future payments underthese guarantees.  The Company has notaccrued any amount in relation to these provisions as no such claims havedeveloped into assertable claims and the Company believes it has defensiblerights to the intellectual property embedded in its products.

 

**NOTE 9 - RESTRUCTURING COSTS AND OTHER INITIATIVES**

 

***Restructuring Costs***

 

For the three and six months ended June 30,2009, the Company recorded restructuring charges of $27.8 million and $32.6million, respectively.  No restructuringcharges were recorded in the comparable periods in 2008. The Company expects to incur additionalrestructuring charges over the next twelve months as it continues to execute the 2009 and 2008 Restructuring Plans.  The following describes the Company’srestructuring initiatives.

 

*2009 Restructuring Plan*

 

OnJune 9, 2009, the Board of Directors of the Company approved a restructuringplan (the “2009 Restructuring Plan”) designed to reduce the Company’s operatingcosts.  The 2009 Restructuring Plan includes a worldwide reduction inforce of approximately 50% of the Company’s headcount, or approximately 2,300employees located primarily in China and the United States and, to alesser degree, other international locations.   During the second quarter of 2009, the Company 

 

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recordeda restructuring charge of approximately $25.9 million related to the 2009Restructuring Plan, including $24.7 million for severance and benefits relatedto approximately 1,850 employees and $1.2 million related to the estimated losson a lease obligation which expires in 2013.

 

*2008 Restructuring Plan*

 

During fiscal 2008, the Companyimplemented a restructuring plan (the “2008 Restructuring Plan”) and recorded$13.1 million in restructuring charges primarily related to a global reductionin force across all functions and employee terminations at certain non-coreoperations which the Company is in the process of winding down. During thethree and six months ended June 30, 2009, the Company recorded restructuring charges related to the 2008Restructuring Plan of approximately $1.8 million and $6.4 million,respectively. The charges for the six months ended June 30, 2009 consistprimarily of severance and benefits related to the transition of certain keyfunctions, including finance, to China and lease costs related to a leaseobligation which expires in fiscal year 2010. Approximately 60 employees areaffected by the transition of these key functions to China.

 

*2007 Restructuring Plan*

 

At June 30, 2009 the restructuring accrualfor the 2007 Plan included within other liabilities of approximately $0.7million was related to a lease obligation which expires in fiscalyear 2010.

 

The activity in the accrued restructuring balances related to the plansdescribed above was as follows for the six months ended June 30, 2009:

 
| ** **                             | ** ** | **Balance at  December 31,  2008** | ** ** | **Restructuring  Charges** | ** ** | **Cash Payments** | ** ** | **Non-cash  Settlement** | ** ** | **Balance at June  30, 2009** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|----------------------------|------------|-------------------|------------|--------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **(in thousands)**                      | ** ** |
| 2009  Restructuring Plan               |       |                                    |       |                       |       |              |       |                     |       |                          |       |
| Worforce  Reduction                    |       | $                                       | —     |                       | $          | 24,715            |       | $                        | (1,070     | )                             | $          | (417 | ) | $ | 23,228 |   |
| Lease  Costs                           |       | —                                  |       | 1,223                      |       | —            | ** ** | **—**               |       | 1,223                         |       |
| Other  Costs                           |       | —                                  |       | 7                          |       | (7                | )          | —                   |       | —                        |       |
| Total  2009 Restructuring Plan         |       | —                                  |       | 25,945                     |       | (1,077            | )          | (417                     | )          | 24,451                        |       |
|                                   |       |                                    |       |                       |       |              |       |                     |       |                          |       |
| 2008  Restructuring Plan               |       |                                    |       |                       |       |              |       |                     |       |                          |       |
| Worforce  Reduction                    |       | 7,976                                   |       | 5,377                      |       | (7,569            | )          | (380                     | )          | 5,404                         |       |
| Lease  Costs                           |       | 249                                     |       | 1,114                      |       | (467              | )          | **—**               |       | 896                           |       |
| Other  Costs                           |       | 498                                     |       | (64                        | )          | (247              | )          | —                   |       | 187                           |       |
| Total  2008 Restructuring Plan         |       | 8,723                                   |       | 6,427                      |       | (8,283            | )          | (380                     | )          | 6,487                         |       |
|                                   |       |                                    |       |                       |       |              |       |                     |       |                          |       |
| 2007  Restructuring Plan - Lease Costs |       | 788                                     |       | 204                        |       | (321              | )          | —                   |       | 671                           |       |
|                                   |       |                                    |       |                       |       |              |       |                     |       |                          |       |
| Total                                  |       | $                                       | 9,511      |                       | $          | 32,576            |       | $                        | (9,681     | )                             | $          | (797 | ) | $ | 31,609 |   |

 

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Thefollowing table shows the total amount of costs incurred by segment inconnection with the restructuring plans:

 
| ** **                            | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | **2009**                              | ** ** | **2009**                            | ** ** |
|                                  |       | **(in  thousands)**                   |       |
| Multimedia  Communications            |       | $                                     | 5,544      |                                | $          | 5,467 |   |
| Broadband  Infrastructure             |       | 3,278                                 |       | 3,280                               |       |
| Handsets                              |       | 931                                   |       | 1,765                               |       |
| Services                              |       | 1,752                                 |       | 3,463                               |       |
| Total  restructuring costs by segment |       | 11,505                                |       | 13,975                              |       |
| General  and Corporate                |       | 16,252                                |       | 18,601                              |       |
| Total  restructuring costs            |       | $                                     | 27,757     |                                | $          | 32,576 |   |

 

Themajority of the cash expenditures related to the 2009 and 2008 RestructuringPlans are expected to be paid in the third and fourth quarters of 2009, withlesser amounts expected to be paid in the first two quarters of 2010.  The remaining liabilities related to leaseobligations are expected to be settled over the remaining lease term.

 

***Other Initiatives***

 

In June 2009, the Company announced its intention to consider apotential sale of its manufacturing, research and development, andadministrative offices facility in Hangzhou, China. Accordingly, managementperformed a recoverability assessment of this asset at June 30, 2009.  Management initially considered whether usingcomparable market transaction activity (market comparison approach) to estimatethe current fair value of the Hangzhou facility would be both feasible and sufficientlyobjective in the circumstances but concluded the secondary market for similarindustrial properties from which to derive sales data was not sufficientlyrobust to place primary reliance on this valuation approach. Therefore,management primarily used the income capitalization approach to estimate fairvalue. This valuation approach involves estimating a current market rental forthe facility through an analysis of rents of similar facilities, either in thelocality or in comparable districts, and then using an applicablecapitalization rate to estimate fair value. This resulted in determining theestimated fair value for the Hangzhou facility to be approximately $170 millionat June 30, 2009, or approximately $8 million greater than the carrying value.No impairment charge was recorded as the estimated fair value of the Hangzhoufacility exceeded carrying value. The income capitalization approach issubjective in nature and involves various assumptions about the capitalizationrate and relevant market rents.

 

**NOTE 10 - COMMITMENTS AND CONTINGENCIES**

 

***Litigation***

 

*Securities Class ActionLitigation*

 

Beginning in October 2004, severalshareholder class action lawsuits alleging federal securities violations werefiled against the Company and various officers and directors of the Company.The actions have been consolidated in United States District Court for theNorthern District of California under the caption *In re UTStarcom, Inc. Securities Litigation*, MasterFile No. C-04-4908-JW (PVT). The lead plaintiffs in the case filed a FirstAmended Consolidated Complaint on July 26, 2005. The First AmendedComplaint alleged violations of the Securities Exchange Act of 1934, and wasbrought on behalf of a putative class of shareholders who purchased the Company’sstock after April 16, 2003 and before September 20, 2004. On April 13,2006, the lead plaintiffs filed a Second Amended Complaint adding newallegations and extending the end of the class period to October 6, 2005.In addition to the Company defendants, the plaintiffs are also suing Softbank.Plaintiffs’ complaint seeks recovery of damages in an unspecified amount.

 

On June 2, 2006, the Company and theindividual defendants filed a motion to dismiss the Second Amended Complaint.On March 21, 2007, the Court granted defendants’ motion and dismissedplaintiffs’ Second Amended Complaint. 

 

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The Court granted plaintiffs leave tofile a Third Amended Complaint, which plaintiffs filed on May 25,2007. On July 13, 2007, the Company and the individual defendants filed amotion to dismiss and a motion to strike the Third Amended Complaint. On March 14,2008, the Court granted defendants’ motion and dismissed plaintiffs’ ThirdAmended Complaint. The Court granted plaintiffs leave to file a FourthAmended Complaint, which plaintiffs filed on May 14, 2008. On June 13,2008, consistent with the Court’s March 14, 2008 dismissal order, theCompany and the individual defendants filed objections to the form and contentof the Fourth Amended Complaint. On July 24, 2008, the Court overruled theobjections. On September 8, 2008, the Company and the individualdefendants filed a motion to dismiss and a motion to strike certain allegationsfrom the Fourth Amended Complaint. On March 27, 2009, the Court denieddefendants’ motion to dismiss and granted defendants’ motion to strike.

 

Due to the status of this lawsuit anduncertainties related to litigation, management is unable to evaluate thelikelihood of either a favorable or unfavorable outcome. Accordingly,management is unable at this time to estimate the effects of this lawsuit onthe Company’s financial position, results of operations, or cash flows.

 

On September 4, 2007, a second shareholderclass action complaint captioned *Peter Rudolph v.UTStarcom, et al.*, Case No. C-07-4578 SI, was filedin the United States District Court for the Northern District ofCalifornia against the Company and some of its current and former directors andofficers. The complaint alleges violations of the Securities Exchange Act of1934 through undisclosed improper accounting practices concerning the Company’shistorical equity award grants. Plaintiff sought unspecified damages on behalfof a purported class of purchasers of the Company’s common stock between July 24,2002 and September 4, 2007. On December 14, 2007, the Court appointedJames R. Bartholomew lead plaintiff. On January 25, 2008, the leadplaintiff filed an amended complaint, which changed the purported class periodto between September 4, 2002 and July 24, 2007. On April 14,2008, the Court granted defendants’ motion to dismiss the amended complaint.The Court granted the lead plaintiff leave to file a second amendedcomplaint no later than May 16, 2008 which was filed by the lead plaintiffon May 16, 2008. On June 6, 2008, defendants filed a motion todismiss the second amended complaint. On August 21, 2008, the Courtgranted in part and denied in part the motion to dismiss. The parties havereached a tentative settlement in the case. On May 29, 2009, the Court granted preliminary approval of thesettlement.  A final approval hearing iscurrently set for September 18, 2009.

 

Under the settlement, which remains subject to finalcourt approval, the insurers would pay the full amount of the settlement shareallocated to the Company, and the Company would bear no financialliability.  The Company, as well as the officerand director defendants who were previously dismissed from the action pursuantto tolling agreements, would receive complete dismissals from the case.  It is uncertain whether the settlement willreceive final court approval.  If thesettlement does not receive final court approval, and litigation against theCompany continues, the Company believes it has meritorious defenses and intendsto defend the action vigorously.

 

*GovernmentalInvestigations*

 

In December 2005, theU.S. Embassy in Mongolia informed the Company that it had forwarded to theDepartment of Justice (the “DOJ”) allegations that an agent of the Company’sMongolia joint venture had offered payments to a Mongolian government officialin possible violation of the Foreign Corrupt Practices Act (the “FCPA”).The Company, through its Audit Committee, authorized an independentinvestigation into possible violations of the FCPA, and it has been in contactwith the DOJ and U.S. Securities and Exchange Commission (the “SEC”) regardingthe investigation. The investigation has identified possible FCPA violations inMongolia, Southeast Asia, India, and China, as well as possible violations ofU.S. immigration laws. The DOJ has requested that the Company voluntarilyproduce documents related to the investigation, the SEC has subpoenaed theCompany for documents, and the Company has received a Grand Jury Subpoenarequiring the production of documents related to one aspect of the DOJinvestigation, that is, training programs the Company had sponsored. The SEChas indicated it regards travel arrangements provided to customers in China inconnection with certain systems contracts, and other conduct, as violations.The Company has executed tolling agreements extending the statute oflimitations for the FCPA issues under investigation by the DOJ. Suchproceedings may result in criminal or civil sanctions, penalties anddisgorgements against the Company. If it is probable that an obligation of theCompany exists and will result in an outflow of resources, a provision will berecorded if the amount can be reasonably estimated. Regulatory and legalproceedings as well as government investigation often involve complex legalissues and are subject to substantial uncertainties. Accordingly, managementexercises considerable judgment in determining whether it is probable that sucha proceeding will result in outflow of resources and whether the amount of theobligation can be reasonably estimated. The

 

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Company periodically reviews the statusof these proceedings and these judgments are subject to change as newinformation becomes available. At this time, the Company cannot predict whenany inquiry will be completed or what the outcome of any inquiry will be. Ajudgment against the Company may have a material adverse effect on the Company’sfinancial position, results of operations and cash flows.

 

*Shareholder DerivativeLitigation*

 

On November 17, 2006, a shareholderderivative complaint captioned *ErnestoEspinoza v. Ying Wu et al.*, Case No. RG06298775, was filedagainst certain of the Company’s current and former officers and directors inthe Superior Court of the County of Alameda, California. The complaint allegesthat the individual defendants, among other things, breached their duties, wereunjustly enriched, and violated the California Corporations Code in connectionwith the timing of stock option grants. The complaint names the Company as anominal defendant and seeks unspecified monetary damages against the individualdefendants and various forms of injunctive relief. On February 2, 2007,the Company and the individual defendants filed demurrers against thecomplaint. On April 11, 2007, the Court sustained the individualdefendants’ demurrer, overruled the Company’s demurrer, ordered the plaintiffto file an amended complaint, and ordered the Company to answer the originalcomplaint. The plaintiff filed an amended complaint and the Company has filedan answer to the amended complaint. On August 21, 2007, the individualdefendants filed demurrers against the amended complaint. The Court sustainedthe individual defendants’ demurrers and ordered the plaintiff to file asecond amended complaint. On September 26, 2008, plaintiff filed hissecond amended complaint. On November 21, 2008, the Company and theindividual defendants filed demurrers against the second amended complaint. On February 27,2009, the Court sustained the Company’s demurrer and ordered the plaintiff tofile a third amended complaint. On March 20, 2009, the plaintiff filed histhird amended complaint. On May 5, 2009, the Company and the individualdefendants filed demurrers against the third amended complaint.

 

Due to the status of this lawsuit anduncertainties related to litigation, management of the Company is unable toevaluate the likelihood of either a favorable or unfavorable outcome.Accordingly, management of the Company is unable at this time to estimate theeffects of this lawsuit on the Company’s financial position, results ofoperations, or cash flows.

 

*IPO Allocation*

 

OnOctober 31, 2001, a complaint was filed in United States District Courtfor the Southern District of New York against the Company, some of the Company’sdirectors and officers and various underwriters for the Company’s initialpublic offering. Substantially similar actions were filed concerning theinitial public offerings for more than 300 different issuers, and the caseswere coordinated as *In re Initial PublicOfferings Securities Litigation*, Civil Action No. 01-CV-9604.  Plaintiffs allege violations of theSecurities Act of 1933 and the Securities Exchange Act of 1934 throughundisclosed improper underwriting practices concerning the allocation of IPOshares in exchange for excessive brokerage commissions, agreements to purchaseshares at higher prices in the aftermarket and misleading analyst reports.  Plaintiffs seek unspecified damages on behalfof a purported class of purchasers of the Company’s common stock between March 2,2000 and December 6, 2000.  TheCompany’s directors and officers have been dismissed without prejudice pursuantto a stipulation.  On February 19,2003, the Court granted in part and denied in part a motion to dismiss theclaims brought by defendants, including the Company.  The order dismissed all claims against theCompany except for a claim brought under Section 11 of the Securities Actof 1933, which alleges that registration statement filed in accordance with theIPO was misleading.

 

In2007, a settlement that had been pending with the Court since 2004 wasterminated by stipulation of the parties to the settlement, after a ruling bythe Second Circuit Court of Appeals in six test cases in the coordinatedproceeding (the action involving the Company is not one of the test cases) madeit unlikely that the settlement would receive final Court approval.  Plaintiffs filed amended master allegationsand amended complaints in the six test cases, which the defendants in thosecases moved to dismiss. In 2008, the Court largely denied the defendants’motion to dismiss the amended complaints.

 

Theparties have reached a global settlement of the litigation.  A motion for preliminary approval of thesettlement was filed with the Court on April 2, 2009.  Under the settlement, which is subject tofinal Court approval, the insurers would pay the full amount of the settlementshare allocated to the Company, and the Company would bear no financialliability.  The Company, as well as theofficer and director defendants who were previously dismissed from the actionpursuant to 

 

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tollingagreements, would receive complete dismissals from the case.  On June 9, 2009, the Court entered anorder granting preliminary approval of the settlement.  It is uncertain whether the settlement willreceive final Court approval.

 

Dueto the preliminary status of these lawsuits and uncertainties related tolitigation, management is unable at this time to estimate the effects of thesecomplaints on our financial position, results of operations, or cash flows.

 

*UTStarcom, Inc. v.Starent Patent Infringement Litigations*

 

On February 16, 2005, the Company filed a suit against Starent forpatent infringement in the U.S. District Court for the Northern Districtof California. In the Complaint, the Company asserted that Starent infringesUTStarcom patent U.S. Reg. No. 6,829,473 (the “473 patent”)through Starent’s development and testing of a software upgrade for itscustomer’s installed ST-16 Intelligent Mobile Gateways. The Company seeksdeclaratory and injunctive relief. Starent subsequently filed its answer andcounterclaims, and the Company then filed a motion to dismiss Starent’scounterclaim. On July 19, 2005, the parties stipulated that Starent wouldfile an amended answer and counterclaim and the Company then responded toStarent’s amended counterclaim. In early December 2006, the Company fileda reissue application for the ‘473 patent with the United StatesPatent and Trademark Office. Starent has also filed for reexamination of the ‘473 patent.The reexamination and reissue are currently co-pending. The litigation is stillin a preliminary stage, and is stayed pending the outcome of the reissue. Thelitigation and its outcome cannot be predicted, although management of theCompany believes the litigation has merit. Nonetheless, management of theCompany believes that any adverse judgment on Starent’s counterclaims will nothave a material adverse effect on the Company’s business, financial condition,results of operations or cash flows.

 

OnMay 8, 2007, the Company filed an additional suit against Starent andsixteen individual defendants (who were all former employees of 3Com’sCommWorks division, of which the Company acquired certain assets in May of2003) in the Northern District of Illinois. The causes of action include claims for patentinfringement, misappropriation of trade secrets, intentional interference withbusiness relations and prospective economic advantage and declarations ofownership of certain patent rights. The Company seeks compensatory damages, punitive damages and injunctiverelief.  After the court denied the defendant’s motion to dismiss themisappropriation of trade secrets claims, on August 30, 2007, Defendantsanswered the Company’s complaint, denying the Company’s allegations andasserting a number of affirmative defenses and counterclaims.  The Companyfiled an Amended Complaint to allege additional related causes of action. Starent moved to dismiss certain causes of action of the AmendedComplaint.  On May 30, 2008, the Company amended its complaint toremove from suit U.S. patent 6,978,128, and to add additional factualallegations relating to all defendants in the case.  On July 23,2008, the Court dismissed the Company’s trade secret and contract-basedcounts.  The Company asked the Court to clarify that ruling and filed amotion for leave to file a Fourth Amended Complaint containing the trade secretand contract-based counts.  After initially granting Defendants’ motion tostrike that complaint, the Court reconsidered its order and granted the Companyleave to file it.  The Fourth Amended Complaint has beenfiled.  On October 14, 2008, Defendants moved to dismissvarious counts of that Complaint, including again seeking to have the tradesecret claims dismissed. On March 24, 2009, the Court ruledon Defendants’ Motion. The Court denied Defendants’ motionto dismiss the Company’s trade secret claims. However, to the extentthe Company’s claims against Defendants for intentional interference withbusiness relations are based on misappropriation of the Company’s tradesecrets, the Court partially dismissed those claims, based upon the doctrine ofpreemption. The Court also dismissed, as not yet ripe foradjudication, one of the patent claims brought by the Company.Finally, the Court also dismissed contract-based claims and relatedclaims against individual defendants who had previously been employedby the 3Com’s CommWorks division. On March 25, 2009, theCourt denied the motion of Starent co-founder Anthony Schoener todismiss him individually based upon lack of personal jurisdiction. On April 21,2009, Defendants answered the remaining claims against them.

 

OnAugust 27, 2008, the Company moved to dismiss Starent’s counterclaims. On December 5, 2008, the Court partially granted this motion. On January 9, 2009, Starent filed amended counterclaims fornon-infringement, invalidity and unenforceability of the asserted patents,tortuous interference with prospective economic advantage and trade secretmisappropriation.  On January 26, 2009, the Company filed an answerto the counterclaims and asserted various affirmative defenses.  On April 21, 2009, in connection withDefendants’ answers to the Company’s claims that remained after the Court’s March 24,2009 ruling on Defendants’ motion to dismiss the Fourth Amended Complaint,Starent and four of the Individual Defendants asserted counterclaims fornon-infringement, invalidity and unenforceability of the asserted patents,tortuous interference with prospective economic advantage and trade secretmisappropriation. On May 14, 2009 the Company filed an answer to thecounterclaims and asserted various affirmative defenses.

 

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OnJune 10, 2009, the parties entered into a Stipulation whereby the Companyagreed to dismiss its claims for misappropriation of trade secrets againstfifteen of the eighteen Individual Defendants (but not against Starent andthree Individual Defendants), intentional interference with business relations(against all defendants), and four of the patent-related claims against thefour Individual Defendants named in those claims. The Stipulation also includesan agreement whereby the patent-related counterclaims asserted against theCompany by the four Individual Defendants are dismissed. The fifteen IndividualDefendants also agreed not to file any future claims or counterclaims againstthe Company (or its successors or assignees) relating to this action unless theCompany files further claims against them. On July 10, 2009, the partiesentered into a Stipulation whereby the Company agreed to dismiss its claim forcopyright infringement against Starent.

 

Discoveryand motion practice is ongoing in this litigation.  The Court hasappointed a special master to handle discovery issues, issues related toidentification of the trade secrets, summary judgments and certain othermotions. The Company believes that any adverse judgment on Starent’scounterclaims will not have a material adverse effect on the Company’sbusiness, financial condition, results of operations of cash flows.

 

*Other Litigation*

 

The Company is a party to otherlitigation matters and claims that are normal in the course of operations, andwhile the results of such litigation matters and claims cannot be predictedwith certainty, management of the Company believes that the final outcome ofsuch matters will not have a material adverse impact on the Company’s financialposition, results of operations or cash flows.

 

***Letters of credit***

 

TheCompany issues standby letters of credit primarily to support internationalsales activities outside of China and in support of purchase commitments.  When the Company submits a bid for a sale,often the potential customer will require that the Company issue a bid bond ora standby letter of credit to demonstrate its commitment through the bidprocess.  In addition, the Company may berequired to issue standby letters of credit as guarantees for advance customerpayments upon contract signing or performance guarantees.  The standby letters of credit usually expirewithout being drawn by the beneficiary thereof. Finally, the Company may issue commercial letters of credit in supportof purchase commitments.  As of June 30,2009 the Company had outstanding letters of credit approximating $47.3 million.At June 30, 2009 the Company had short-term restricted cash of $15.1million, and had long-term restricted cash of $18.4 million included in otherlong-term assets. These amounts primarily collateralize the Company’s issuancesof standby and commercial letters of credit.

 

**NOTE 11 — STOCK INCENTIVE PLANS**

 

Duringthe six months ended June 30, 2009, the Company granted equity awardsincluding restricted stock, restricted stock units and stock options. Suchawards generally vest over a period of one to four years from the date ofgrant.  Restricted stock has the votingrights of common stock and the shares underlying restricted stock are issuedand outstanding.

 

InFebruary 2008, the Compensation Committee granted 1,073,333performance-based awards to certain senior executive officers.  During the third quarter of 2008, 233,333 ofthese contingently issuable shares were forfeited as a result of employeeterminations.  On October 6, 2008, theperformance requirements with respect to 60,000 of these contingently issuableshares were eliminated; these restricted stock units have a fair value of $2.69per share, which equals the closing price of the Company’s common stock on theNASDAQ Stock Market on the measurement date of October 6, 2008. On February 18,2009, the Committee determined, based on the Company’s and each executiveofficer’s level of performance during the Company’s 2008 fiscal year, that anadditional 367,500 shares underlying the previously granted performance-basedrestricted stock units had been earned, each of these performance-basedrestricted stock units has a fair value of $1.27 per share, which equals theclosing price of the Company’s common stock on the NASDAQ Stock Market on themeasurement date of February 18, 2009. These restricted stock units vested 50% on February 27, 2009 andwill vest 50% on February 26, 2010.

 

InFebruary 2009, the Compensation Committee also granted to senior executiveofficers 313,293 restricted stock units with a four-year vesting and anadditional 626,586 performance-based awards, subject to the attainment of goalsdetermined by the Compensation Committee. The Company may be subject to variable levels of expense relatedprimarily to the varying levels of performance, as well as for fluctuations inthe Company’s stock price as these awards are “marked to market” periodicallyprior to the date of the Compensation Committee’s determination on performance.

 

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Toreduce the Company’s long term cost structure and manage shareholder dilution,the Company elected to terminate the ESPP program in February 2009 with aneffective date of May 15, 2009.  The cancellation has been accountedfor as a settlement of shares for no consideration.  This resulted in animmediate expense recognition of $1.2 million in the first quarter of 2009associated with the unrecognized compensation for canceled purchase periods ofthe 24-month offering.

 

During the quarter ended June 30,2009, an adjustment was made to increase the estimated forfeiture rate forequity awards of employees that are being included in the 2009 RestructuringPlan as the awards are not expected to ultimately vest.  The resulting net effect of the forfeiturerate adjustment was a decrease to the Company’s stock-based compensationexpense for the three months ended June 30, 2009 by approximately $0.4million.

 

Certain executives of theCompany have employment contracts which provide for acceleration of allunvested equity awards in the event that the employee is terminated withoutcause.  During the three months ended June 30,2009, several executives were involuntarily terminated as part of the 2009Restructuring Plan. The unrecognized compensation costs related to theacceleration of approximately $0.4 million were recognized upon terminationwithin restructuring.

 

The total stock-basedcompensation expense recognized in the condensed consolidated statements ofoperations was as follows:

 
| ** **                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                          | ** ** | **(in thousands)**                         | ** ** |
| Cost of net sales                   |       | $                                               | 60         |                                          | $          | 334 |   | $ | 491 |   | $ | 594 |   |
| Selling, general and administrative |       | 1,617                                           |       | 4,029                                         |       | 4,056 |   | 8,026 |   |
| Research and development            |       | 186                                             |       | 686                                           |       | 1,083 |   | 1,224 |   |
| Restructuring                       |       | 417                                             |       | —                                        |       | 797 |   | — |   |
| Total                               |       | $                                               | 2,280      |                                          | $          | 5,049 |   | $ | 6,427 |   | $ | 9,844 |   |

 

Optionactivity as of June 30, 2009 and changes during the six months ended June 30,2009 were as follows:

 
| ** **                                  | ** ** | **Number of  shares  outstanding** | ** ** | **Weighted  average  exercise  price** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|
|                                        |       | **(in  thousands)**                |       |                                   |       |   |
| Options outstanding, December 31, 2008 |       | 8,767                              |       | $                                      | 9.63       |   |
| Options granted                             |       | 103                                |       | $                                      | 1.07       |   |
| Options exercised                           |       | (3                                 | )          | $                                      | 0.25       |   |
| Options forfeited or expired                |       | (1,413                             | )          | $                                      | 13.67      |   |
| Options outstanding, June 30, 2009     |       | 7,454                              |       | $                                      | 8.75       |   |

 

Nonvestedrestricted stock and restricted stock units as of June 30, 2009, andchanges during the six months ended June 30, 2009, were as follows:

 
| ** **                            | ** ** | **Shares**         | ** ** | **Weighted  average grant  date fair value** | ** ** |
|---------------------------------------|------------|--------------------|------------|----------------------------------------------|------------|
|                                  |       | **(in thousands)** |       |                                         |       |   |
| Nonvested at December 31, 2008   |       | 6,712              |       | $                                            | 2.96       |   |
| Granted                               |       | 1,365              |       | $                                            | 1.01       |   |
| Vested                                |       | (2,039             | )          | $                                            | 2.97       |   |
| Forfeited                             |       | (684               | )          | $                                            | 2.86       |   |
| Total nonvested at June 30, 2009 |       | 5,354              |       | $                                            | 2.47       |   |

 

AtJune 30, 2009, there was approximately $13.6 million of total unrecognizedcompensation cost, related to non-vested stock options, restricted stock andrestricted stock units, as measured, which the Company expects to recognizeover a 

 

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weighted-averageperiod of 2.1 years. For additional information regarding the Company’sstock-based compensation plans, see the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**NOTE 12 - INCOME TAXES**

 

As of December 31, 2008, the Company’sgross unrecognized tax benefits totaled $92.8 million and are included inother long-term liabilities, net of certain deferred tax assets and the federaltax benefit of state income tax items totaling $82.1 million. Ifrecognized, the portion of gross unrecognized tax benefits that would decreasethe provision for income taxes and increase the Company’s net income isapproximately $10.7 million.

 

Asof June 30, 2009, the Company’s gross unrecognized tax benefits of approximately$66.7 million, netof certain deferred tax assets and the federal tax benefit of state income taxitems totaling $57.7 million,were included in other long-term liabilities and other current liabilities. Ifrecognized, the portion of gross unrecognized tax benefits that would decreasethe provision for income taxes and increase the Company’s net income isapproximately $9.0 million. TheCompany has reduced its total unrecognized tax benefits by approximately $26.5million during the first quarter of 2009 due to statute of limitationsexpirations and settlements of income tax audits. The portion of this $26.5million reduction of gross unrecognized tax benefits that decreased theprovision for income taxes and increased the Company’s net income during thequarter was approximately $1.4 million. The total unrecognized tax benefitsrelate primarily to the allocations of revenue and costs among our globaloperations.

 

TheCompany recognizes interest expense and penalties related to the aboveunrecognized tax benefits within income tax expense. The Company had accruedinterest and penalties of approximately $3.9 million as of December 31,2008 and approximately $2.9 million as of June 30, 2009. The Company has reduced its interestexpense and penalties recorded within income tax expense by approximately $1.4million during the first quarter of 2009 due to statute of limitationsexpirations and settlements of income tax audits.

 

The Company is subject to taxation in theU.S. federal jurisdiction and various U.S. state and foreignjurisdictions. The Company is under audit by the taxing authorities in China ona recurring basis. The material jurisdictions that the Company is subject toexamination are in the United States and China. The Company’s tax yearsfor 1999 through 2008 are still open for examination in China. The Company’stax years for 2006 through 2008 are still open for examination in theUnited States.

 

FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”(“FIN 48”) established criteria for recognizing or continuing to recognizeonly more-likely-than-not tax positions, which may result in income tax expensevolatility in future periods. While the Company believes that it has adequatelyprovided for all tax positions, amounts asserted by taxing authorities could begreater than the Company’s accrued position. Accordingly, additional provisionson income tax related matters could be recorded in the future as revisedestimates are made or the underlying matters are settled or otherwise resolved.

 

In establishing its deferred income taxassets and liabilities, the Company makes judgments and interpretations basedon the enacted tax laws and published tax guidance applicable to itsoperations. The Company records deferred tax assets and liabilities andevaluates the need for valuation allowances to reduce the deferred tax assetsto realizable amounts. The likelihood of a material change in the Company’sexpected realization of these assets is dependent on future taxable income andits ability to use foreign tax credit carryforwards and carrybacks.

 

Incometax expense was $4.7 millionfor the three months ended June 30, 2009 compared to $4.6 million for thethree months ended June 30, 2008. Income tax expense was $6.5 million for the six months ended June 30,2009 compared to a tax benefit of $0.4 million for the six months ended June 30,2008.

 

During the second quarter of 2009, the Company made an assessment ofthe realizability of its deferred tax assets in Korea, which are included inthe Handsets segment, and believes that it will not generate sufficient incometo realize its deferred tax assets in Korea. Therefore, it established a valuation allowance on its remaining netdeferred tax assets in Korea.  The incometax expense associated with establishing the valuation allowance is $1.4million. Income tax expense for the six months ended June 30, 2009also included a first quarter tax benefit of $2.8 million related to therecognition of previously 

 

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unrecognizedtax benefits and the reversal of interest and penalties due to statute oflimitations expirations and income tax audit settlements.

 

TheChina Corporate Income Tax Law (“CIT Law”) was effective on January 1,2008.  As a result of the enactment ofregulations during the first quarter of 2008 which addressed CIT Law, theCompany recorded an income tax benefit of $11.7 million related to reversing adeferred tax liability on foreign withholding taxes related to the unremittedearnings of the Company’s subsidiaries which the Company had previouslydetermined to not be permanently reinvested outside the United States.  The Company also accrued $3.2 million offoreign withholding taxes related to the realized gain on the sale of its investmentin Gemdale.

 

For2009 and 2008, the Company has not provided any tax benefit on any forecastedlosses incurred and tax credits generated in the United States and othercountries, because management believes that it is more likely than not that thetax benefit associated with these losses will not be realized. Also, for 2009and 2008, the Company continues to accrue tax expense in jurisdictions wherethe Company has been historically profitable. Estimates of the annual effectivetax rate at the end of the interim periods are based on evaluations of possiblefuture events and transactions and may be subject to subsequent refinement orrevision.

 

**NOTE 13 - OTHER INCOME (EXPENSE), NET**

 

Other income (expense), net for the three and sixmonths ended June 30, 2009 and 2008, respectively were comprised of thefollowing:

 
| ** **                                                                     | ** ** | **Three  months ended June 30,** | ** **  | **Six  months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|-------------|-------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                              | ** **  | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                    | ** **  |
| Gain  on sale of investments                                                   |       | $                                     | —      |                                | $          | — |   | $ | — |   | $ | 39,679 |   |
| Gain  on liquidation of investment in a variable interest entity (see Note 17) |       | —                                |        | —                              |       | — |   | 8,169 |   |
| Other-than-temporary  impairment of equity investment                          |       | (3,798                                | )           |                                |       | (3,798 | ) |   |   |
| Foreign  exchange gains (losses)                                               |       | 9,003                                 |        | (1,559                              | )          | 1,745 |   | 4,150 |   |
| Other                                                                          |       | 224                                   |        | 639                                 |       | 268 |   | 1,052 |   |
| Total                                                                          |       | $                                     |  5,429 |                                | $          |  (920 | ) | $ |  (1,785 | ) | $ |  53,050 |   |

 

**NOTE 14 - SEGMENT REPORTING**

 

To align the business units with its corporate strategy to focus oncore businesses, on July 1, 2008 the Company sold PCD toPCD LLC (see Note 3). Prior to July 1, 2008, PCD sold and supported handsetsother than PAS handsets, mainly in the United States. Included in theOther segment are Mobile Solutions Business Unit (“MSBU”) and Custom SolutionsBusiness Unit (“CSBU”).  On July 31,2008, the Company sold MSBU which was responsible for the development, salesand service of the Company’s wireless IPCDMA/IPGSM product line. In the firstquarter of 2009, the Company completed the wind-down of CSBU and theconsolidation of voice messaging technology into its Multimedia Communicationssegment. CSBU historically had been responsible for the development, sales andservice of other non-core products. The consolidation of voice messagingtechnology into the Multimedia Communications segment did not have asignificant impact on segment net sales or gross profit. As a result of thesechanges the Company revised its internal reporting structure, operatingsegments and reporting segments.

 

Effective January 1, 2009, the new reporting segments are asfollows:

 

·                  MultimediaCommunications—Focused on development and market opportunities in IPTVsolutions and Wireless infrastructure technologies.

 

·                  BroadbandInfrastructure—Focused on the Company’s portfolio of broadband products.

 

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·                  Handsets—Focused on mobilephone business with continued focus on the PAS and CDMA handset market, as wellas data cards markets. Handset sales to PCD LLC, which commenced after theJuly 1, 2008 sale of PCD, are included in this segment.

 

·                  Services—Focused onproviding services and support of the Company’s Broadband Infrastructure andMultimedia Communications product lines.

 

The Company’s chief operatingdecision makers make financial decisions based on information they receive fromtheir internal management system and currently evaluate the operatingperformance of and allocate resources to the reporting segments based onsegment revenue and gross profit. Cost of sales and direct expenses in relationto production are assigned to the reporting segments.  The accounting policies used in measuringsegment assets and operating performance are the same as those used at the consolidatedlevel.

 

Summarized below are the Company’ssegment net sales, gross (loss) profit and segment margin for the three and sixmonths ended June 30, 2009 and 2008 based on the current reporting segmentstructure:

 
|                                 |       | **Three  months ended June 30,** |       | **Six  months ended June 30,** |       |
|--------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
|                                 |       | **2009**                              | ** ** | **% of  net  sales**                | ** ** | **2008** | ** ** | **% of  net  sales** | ** ** | **2009** | ** ** | **% of  net  sales** | ** ** | **2008** | ** ** | **% of  net  sales** |   |
|                                 |       | **(in thousands)**               |       |
| ***Net Sales by Segment***           | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Multimedia  Communications           |       | $                                     | 38,968     |                                | 49         | % | $ | 74,018 |   | 12 | % | $ | 73,000 |   | 37 | % | $ | 141,464 |   | 12 | % |
| Broadband Infrastructure             |       | 13,583                                |       | 17                                  | %          | 35,888 |   | 6 | % | 29,002 |   | 14 | % | 61,479 |   | 5 | % |
| Handsets                             |       | 13,184                                |       | 16                                  | %          | 49,461 |   | 8 | % | 69,245 |   | 35 | % | 93,484 |   | 8 | % |
| Services                             |       | 14,428                                |       | 18                                  | %          | 15,884 |   | 2 | % | 28,256 |   | 14 | % | 26,975 |   | 2 | % |
| PCD                                  |       | —                                |       | —                              |       | 448,864 |   | 71 | % | — |   | — |   | 879,588 |   | 72 | % |
| Other                                |       | —                                |       | —                              |       | 8,641 |   | 1 | % | — |   | — |   | 15,755 |   | 1 | % |
|                                 |       | $                                     | 80,163     |                                | 100        | % | $ | 632,756 |   | 100 | % | $ | 199,503 |   | 100 | % | $ | 1,218,745 |   | 100 | % |
| ** **                           | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       | **Three  months ended June 30,** | ** ** | **Six  months ended June 30,** |       |
|                                 |       |                                  |       | **Gross**                           | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** |   |
|                                 |       | **2009**                              | ** ** | **Profit  %**                       | ** ** | **2008** | ** ** | **Profit  %** | ** ** | **2009** | ** ** | **Profit  %** | ** ** | **2008** | ** ** | **Profit  %** |   |
|                                 |       | **(in  thousands)**                   |       |
| ***Gross (loss) profit by Segment*** | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Multimedia  Communications           |       | $                                     | 12,077     |                                | 31         | % | $ | 28,818 |   | 39 | % | $ | 22,630 |   | 31 | % | $ | 61,974 |   | 44 | % |
| Broadband Infrastructure             |       | 614                                   |       | 5                                   | %          | 1,669 |   | 5 | % | 2,234 |   | 8 | % | 3,890 |   | 6 | % |
| Handsets                             |       | (34,221                               | )          | (260                                | )%         | 6,781 |   | 14 | % | (27,919 | ) | (40 | )% | 22,996 |   | 25 | % |
| Services                             |       | 5,692                                 |       | 39                                  | %          | 4,794 |   | 30 | % | 8,869 |   | 31 | % | 7,113 |   | 26 | % |
| PCD                                  |       | —                                |       | —                              |       | 36,169 |   | 8 | % | — |   | — |   | 69,005 |   | 8 | % |
| Other                                |       | —                                |       | —                              |       | 3,717 |   | 43 | % | — |   | — |   | 9,049 |   | 57 | % |
|                                 |       | $                                     | (15,838    | )                                   | (20        | )% | $ | 81,948 |   | 13 | % | $ | 5,814 |   | 3 | % | $ | 174,027 |   | 14 | % |

 
| ** **                              | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                              | ** ** | **(in thousands)**                   | ** ** |
| ***Segment Margin and Operating Loss*** | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Multimedia  Communications              |       | $                                    | 1,779      |                               | $          | 16,262 |   | $ | 199 |   | $ | 32,457 |   |
| Broadband  Infrastructure               |       | (3,522                               | )          | (4,715                             | )          | (6,685 | ) | (8,941 | ) |
| Handsets                                |       | (38,702                              | )          | (6,443                             | )          | (38,466 | ) | (5,422 | ) |
| Services                                |       | 5,314                                |       | 3,849                              |       | 8,327 |   | 4,795 |   |
| PCD                                     |       | —                               |       | 28,612                             |       | — |   | 53,576 |   |
| Other                                   |       | —                               |       | (6,185                             | )          | — |   | (10,343 | ) |
| Total segment margin                    |       | (35,131                              | )          | 31,380                             |       | (36,625 | ) | 66,122 |   |
| General and Corporate                   |       | (50,307                              | )          | (62,458                            | )          | (107,668 | ) | (128,089 | ) |
| Operating Loss                          |       | $                                    | (85,438    | )                                  | $          | (31,078 | ) | $ | (144,293 | ) | $ | (61,967 | ) |

 

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Assets by segmentare as follows:

 
| ** **                               | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| ***Property, Plant and Equipment, net*** |       |               |       |                  |       |
| Multimedia  Communications               |       | $                  | 76,180     |                  | $          | 78,890 |   |
| Broadband  Infrastructure                |       | 38,286             |       | 39,649                |       |
| Handsets                                 |       | 38,602             |       | 39,975                |       |
| Services                                 |       | 16,196             |       | 16,773                |       |
|                                     |       | $                  | 169,264    |                  | $          | 175,287 |   |

 
| ** **                 | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|----------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                 | ** ** | **(in thousands)** | ** ** |
| ***Total assets***         |       |               |       |                  |       |
| Multimedia  Communications |       | $                  | 438,692    |                  | $          | 602,207 |   |
| Broadband  Infrastructure  |       | 401,082            |       | 337,571               |       |
| Handsets                   |       | 101,666            |       | 288,050               |       |
| Services                   |       | 138,764            |       | 75,633                |       |
| Other                      |       | —             |       | 7,345                 |       |
|                       |       | $                  | 1,080,204  |                  | $          | 1,310,806 |   |

 

Sales are attributed to ageographical area based upon the location of the customer. Sales data bygeographical area are as follows:

 
| ** **                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | ** **                                          | ** ** | **% of net**                            | ** ** | ** ** | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** |
| ** **                | ** ** | **2009**                                            | ** ** | **sales**                                         | ** ** | **2008** | ** ** | **sales** | ** ** | **2009** | ** ** | **sales** | ** ** | **2008** | ** ** | **sales** | ** ** |
| ** **                | ** ** | **(in thousands)**                             | ** ** |
| ***Net Sales by region*** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States             |       | $                                                   | 1,731      |                                              | 2          | % | $ | 442,780 |   | 70 | % | $ | 42,990 |   | 21 | % | $ | 864,643 |   | 71 | % |
| China                     |       | 52,531                                              |       | 66                                                | %          | 110,752 |   | 18 | % | 103,749 |   | 52 | % | 227,874 |   | 19 | % |
| India                     |       | 9,536                                               |       | 12                                                | %          | 5,399 |   | 1 | % | 19,120 |   | 10 | % | 12,836 |   | 1 | % |
| Other                     |       | 16,365                                              |       | 20                                                | %          | 73,825 |   | 11 | % | 33,644 |   | 17 | % | 113,392 |   | 9 | % |
| Total net sales           |       | $                                                   | 80,163     |                                              | 100        | % | $ | 632,756 |   | 100 | % | $ | 199,503 |   | 100 | % | $ | 1,218,745 |   | 100 | % |

 

Long-lived assets,consisting of property, plant and equipment, by geographical area are asfollows:

 
| ** **              | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|-------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **              | ** ** | **(in thousands)** | ** ** |
| United States           |       | $                  | 371        |                  | $          | 627 |   |
| China                   |       | 168,265            |       | 172,844               |       |
| Other                   |       | 628                |       | 1,816                 |       |
| Total long-lived assets |       | $                  | 169,264    |                  | $          | 175,287 |   |

 

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**NOTE15 - CREDIT RISK AND CONCENTRATION**

 

TheCompany’s accounts receivable balance included amounts due from PCD LLC,representing approximately 39% at December 31, 2008. No customer accountedfor greater than 10% of the Company’s accounts receivable balance at June 30,2009.

 

Thefollowing customers accounted for 10% or more of the Company’s net sales:

 
| ** **       | ** ** | **For the three**    | ** ** | **For the six**   | ** ** |
|------------------|------------|----------------------|------------|-------------------|------------|
| ** **       | ** ** | **months ended**     | ** ** | **months ended**  | ** ** |
| ** **       | ** ** | **June 30,**    | ** ** | **June 30,** | ** ** |
| ** **       | ** ** | **(% of net sales)** | ** ** |
| **2009**         | ** ** | ** **           | ** ** | ** **        | ** ** |
| PCD LLC          |       | —               |       | 17                | %          |
|             |       |                 |       |              |       |
| **2008**         | ** ** | ** **           | ** ** | ** **        | ** ** |
| Verizon Wireless |       | 30                   | %          | 27                | %          |
| Sprint Spectrum  |       | 13                   | %          | 15                | %          |

 

Approximately 24% and 11% of the Company’s net salesduring the three months ended June 30, 2009 and 2008, respectively, andapproximately 18% and 12% of the Company’s net sales during the six monthsended June 30, 2009 and 2008, respectively, were to entities affiliatedwith the government of China. Accounts receivable balances from these Chinagovernment affiliated entities or state owned enterprises were $63.3 millionand $86.2 million as of June 30, 2009 and December 31, 2008,respectively. The Company extends credit to its customers in China generallywithout requiring collateral. With respect to global sales outside of China,the Company may require letters of credit from its customers. The Companymonitors its exposure for credit losses and maintains allowances for doubtful accounts.The Company recorded net recoveries of doubtful accounts of approximately $10.5million and $2.1 million during the three and six months ended June 30,2009, respectively, primarily due to significant collection of long-agedreceivables during the second quarter of 2009, partially offset by provisionfor doubtful accounts.

 

Approximately 66% and 18% of the Company’s net salesfor the three months ended June 30, 2009 and 2008, respectively, andapproximately 52% and 19% of the Company’s net sales during the six monthsended June 30, 2009 and 2008, respectively were made in China.Accordingly, the political, economic and legal environment, as well as thegeneral state of China’s economy may influence the Company’s business,financial condition and results of operations. The Company’s operations inChina are subject to special considerations and significant risks not typicallyassociated with companies in the United States. These include risks associatedwith, among others, the political, economic and legal environments and foreigncurrency exchange. The Company’s results may be adversely affected by, amongother things, changes in the political, economic and social conditions inChina, and by changes in governmental policies with respect to laws and regulations,changes in China’s telecommunications industry and regulatory rules andpolicies, anti-inflationary measures, currency conversion and remittanceabroad, and rates and methods of taxation.

 

**NOTE 16- RELATED PARTY TRANSACTIONS**

 

*Softbankand affiliates*

 

The Company recognizesrevenue with respect to sales of telecommunications equipment to affiliates ofSoftbank, a significant stockholder of the Company. Softbank offers ADSLcoverage throughout Japan, which is marketed under the name “YAHOO! BB.” TheCompany supports Softbank’s fiber-to-the-home service through sales of itscarrier class GEPON product as well as its NetRingÔproduct. In addition, the Company supports Softbank’s new internet protocoltelevision (“IPTV”), through sales of its RollingStreamÔproduct. The Company recognized revenue for sales of telecommunicationsequipment and services to affiliates of Softbank of $5.0 million and $9.4million, respectively, during the three months ended June 30, 2009 and2008, and $11.2 million and $21.2 million, respectively, during the six monthsended June 30, 2009 and 2008.

 

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Included in accountsreceivable at June 30, 2009 and December 31, 2008 were $5.6 millionand $9.2 million, respectively, related to these transactions. The Companyhad immaterial amounts of accounts payable to Softbank and its affiliates at June 30,2009 and December 31, 2008.

 

Sales to Softbank includea three year service period and a penalty clause if product failure ratesexceed a certain level over a seven year period. As of June 30, 2009 and December 31,2008, the Company’s customer advance balance related to Softbank agreements was$0.8 million and $0.7 million, respectively. The current deferred revenue balance related to Softbank was $2.0million and $4.0 million as of June 30, 2009 and December 31, 2008,respectively.  As of June 30, 2009,the Company’s noncurrent deferred revenue balance related to Softbank was $9.0million compared to $9.2 million as of December 31, 2008.

 

As of June 30, 2009,Softbank beneficially owned approximately 12% of the Company’s outstandingstock.

 

**NOTE17—VARIABLE INTEREST ENTITIES**

 

InOctober 2008, the Company made an investment in Turnstone EnvironmentTechnologies LLC (“TET”), a Delaware limited liability company formed forthe purpose of licensing and developing energy efficient renewable coolingsolutions for cell towers in the telecommunications industry. In exchange for5,180,788 Series A Preferred units representing approximately 22% ofvoting interest in TET and 500,000 Series A Preferred warrants at anexercise price of $0.9265 per unit and with an expiration term of 5 years,the Company contributed $4.8 million in cash. The Company currently doesnot have any representation on TET’s board of directors nor the ability tocontrol the management and operation decisions of TET. The operations of TETare in the development stage and the entity is actively seeking additionalinvestors. The Company does not intend to and has no obligation to fund futurelosses or make additional contributions other than its initial investment. Asof June 30, 2009 and December 31, 2008, TET was in effect entirelyfunded by the Company’s initial investment as the capital contributions of theother current investors were not substantive. The Company has determined thatthe venture is a variable interest entity and the Company is the primarybeneficiary because it is exposed to the majority of the variable interestentity’s expected losses. Therefore, the Company is required to consolidate TET’sfinancial statements under FIN 46R, “Consolidation of Variable InterestEntities.” Beginning January 1, 2009, the assets, liabilities andoperating results of TET were consolidated into the Company’s balance sheet andstatement of operations. The assets, liabilities and operating results of TETwere determined to be immaterial to the Company as of December 31, 2008and to the Company’s results of operations and cash flows for the full year andthe fourth quarter of 2008 and, therefore, were not consolidated. TET had norevenue and had a loss of $0.6 million for the six months ended June 30,2009. The consolidation of TET represented $4.5 million of the total assets and$0.3 million of the total liabilities of the Company as of June 30, 2009.

 

Duringthe fourth quarter of 2005, the Company provided an interest free,$12.4 million loan to a party in China as seed capital for a venture organizedto participate in providing technical service, networking technology andequipment to the emerging market for IPTV products in China. The loan,partially secured by an indirect ownership interest in the venture, was payablein 10 years and could be called early without penalty. As a result of theforegoing, and the fact that the venture’s continuing viability was heavilydependent on the further provision of network and terminal equipment by theCompany, the Company determined that the venture was a variable interest entity(“VIE”) and that the Company was the primary beneficiary of the venture.Therefore, the Company was required to consolidate the VIE’s financialstatements. The consolidation of this VIE in prior years did not have asignificant impact on the Company’s consolidated financial statements. In March 2008,the Company received a repayment in full of the loan’s principal balance,eliminating its interest in the VIE, and resulting in reconsideration of theCompany’s position as the primary beneficiary. Based on this reconsiderationevent, management has concluded the Company is no longer the primarybeneficiary under FIN 46R, “Consolidation of Variable Interest Entities” and isno longer required to consolidate the VIE’s financial statements. The Company’sConsolidated Statement of Operations for the three month period ended March 31,2008 includes the operating results of the VIE through February 2008, atwhich point the VIE was deconsolidated from the Company’s financial statements.The Company recorded an $8.2 million gain upon the repayment of the loan anddeconsolidation that was included in other income, net, for the three monthsended March 31, 2008.  As management expects continuinginvolvement with the ongoing entity’s business as a supplier of IPTV equipment,the Company has determined the conditions for presentation as a discontinuedoperation have not been met.

 

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**ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report on Form 10-Qcontains forward-looking statements regarding future events and our futureresults that are subject to the safe harbors created under the Securities Actof 1933 and the Securities Exchange Act of 1934. Forward-looking statements arebased on current expectations, estimates, forecasts and projections about us,our future performance and the industries in which we operate as well as on ourmanagement’s assumptions and beliefs. Statements that contain words like “expects,”“anticipates,” “may,” “will,” “targets,” “projects,” “intends,” “plans,” “believes,”“seeks,” “estimates,” or variations of such words and similar expressions areforward-looking statements. In addition, any statements that refer to trends inour businesses, future financial results, and our liquidity and business plansare forward-looking statements. Readers are cautioned that theseforward-looking statements are only predictions and are subject to risks anduncertainties, including those discussed in “Part II, Item 1A-Risk Factors”of this Form 10-Q.  Therefore,actual results may differ materially and adversely from those expressed in anyforward-looking statements. We do not guarantee future results, and actualresults, developments and business decisions may differ from those contemplatedby those forward-looking statements.  Weundertake no obligation to update these forward-looking statements to reflectevents or circumstances occurring after the date of this Form 10-Q.

 

**EXECUTIVESUMMARY**

 

We design, manufacture and sell IP-based telecommunicationsinfrastructure products including our primary product suite of InternetProtocol TV (“IPTV”), Next Generation Network (“NGN”) and broadband solutionsalong with the ongoing services relating to the installation, operation andmaintenance of these products. In addition, we also sell handsets that aredesigned and manufactured primarily for the China market. Our products are soldprimarily to telecommunications service providers or operators. We sell anextensive range of products that are designed to enable voice, data and videoservices for our operator customers and consumers around the world. Over thepast few years, we have expanded our focus to build a global presence andcurrently sell our products in several established and emerging growth marketsin Asia, Latin America and Europe. We intend to continue to invest in productswith technological differentiation likely to drive revenue growth and improvedmargins.  We also intend to maintain astrategic presence in the most attractive markets.

 

We differentiate ourselves with products designed to reduce networkcomplexity, integrate high performance capabilities and allow a simpletransition to next generation networks. We design our products to facilitatecost-effective and efficient deployment, maintenance and upgrades.

 

Because our products are IP-based, our customers can more easilyintegrate our products with other industry standard hardware and software.Additionally, we believe we can introduce new features and enhancements thatcan be cost-effectively added to our customers’ existing networks. IP-baseddevices can be changed or upgraded in modules, saving our customers the expenseof replacing their entire system installation.

 

**Overview of Our Second Quarter 2009**

 

·                  Net sales decreased by $552.6 million to $80.2 million during the threemonths ended June 30, 2009 compared to the same period in 2008. Thedecrease was primarily due to the sale of UTStarcom PersonalCommunications LLC, a wholly-owned subsidiary of the Company (“PCD”) toPersonal Communications Devices, LLC (“PCD LLC”), in July 2008. The PCD segment accounted for $448.9 million of net sales for the secondquarter of 2008.  Also significantlyimpacting the decrease in net sales in the second quarter of 2009 was thecontinued weakening demand for our PAS Infrastructure and Handsets products.

 

·                  Gross profit was negative 20% of net sales in the second quarter of2009 compared to 13% of net sales in the same period of 2008.  This decrease was mainly due to the decreasein net sales, additional inventory reserves and warranty claim settlement chargesfor the Handsets segment and a decrease in sales of higher margin MultimediaCommunications products during the second quarter of 2009.

 

·                  In the second quarter of 2009, grossprofit of the Handsets segment was reduced approximately $28.7 million as a resultof transactions with PCD LLC. As a result of the Settlement Agreement andRelease entered into with PCD LLC in June 2009, we recorded charges of approximately $11.1 millionfor product-related liability disputes.  An additional $17.6 million of costs were recorded for inventorywrite-downs to net realizable value, write-downs of 

 

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excess inventoryand warranty reserves. We recorded these transactions in the second quarter of2009 resulting in a decrease in revenue of approximately $2.7 million and anincrease in cost of net sales of $26.0 million.

 

·                  Selling, general and administrative andresearch and development operating expenses decreased 61% in the second quarterof 2009 compared with the second quarter of 2008 primarily as a result of thesale of PCD and other non-core assets and other management restructuringinitiatives. Selling, general and administrative for the second quarter of 2009includes a $10.5 million recovery of doubtful accounts compared to $3.4 millionprovision of doubtful accounts in the same period of 2008.

 

·                  On June 9, 2009, our Board of Directors approveda restructuring plan (the “2009 Restructuring Plan”) designed to reduceoperating expenses.  The 2009 Restructuring Plan includes a worldwidereduction in force of approximately 50% of the Company’s headcount. Theinitiatives also include plans to outsource manufacturing operations andoptimize research and development spending with a focus on selected products.We recognized $27.8 million in restructuring charges during the three monthsended June 30, 2009 related to our 2009 Restructuring Plan and priorplans.

 

**OtherInitiatives**

 

In June 2009,we announced our intention to consider a potential sale of our manufacturing,research and development, and administrative offices facility in Hangzhou,China. Accordingly, management performed a recoverability assessment for thisasset at June 30, 2009.  Weinitially considered whether using comparable market transaction activity(market comparison approach) to estimate the current fair value of the Hangzhoufacility would be both feasible and sufficiently objective in the circumstancesbut concluded the secondary market for similar industrial properties from whichto derive sales data was not sufficiently robust to place primary reliance onthis valuation approach. Therefore, management primarily used the incomecapitalization approach to estimate fair value. This valuation approachinvolves estimating a current market rental for the facility through ananalysis of rents of similar facilities, either in the locality or incomparable districts, and then using an applicable capitalization rate toestimate fair value. This resulted in determining the estimated fair value forthe Hangzhou facility to be approximately $170 million at June 30, 2009,or approximately $8 million greater than the carrying value.  No impairment charge was recorded as theestimated fair value of the Hangzhou facility exceeded  carrying value. The income capitalizationapproach is subjective in nature and involves various assumptions about thecapitalization rate and relevant market rents.

 

Whilethe valuation may be supported by the income capitalization approach discussedabove, management believes the net realizable value of the Hangzhou facility ina sale transaction could differ significantly from the estimated fair value aswell as the carrying value. Due to the unique characteristics of thisstructure, including its size of approximately 2.7 million square feet anddesign, we are unable to predict whether the estimated fair value under the incomecapitalization approach will approximate the ultimate realization upon anypotential sale. If the actual market value is determined to be less than thecarrying value, we may need to record an impairment charge against futureearnings.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations isbased upon our Consolidated Condensed Financial Statements, which we haveprepared in accordance with GAAP. The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenue and expenses, and related disclosure ofcontingent assets and liabilities. Estimates are based on historical experience,knowledge of economic and market factors and various other assumptions thatmanagement believes to be reasonable under the circumstances. Actual resultsmay differ from those estimates.

 

On a regular basiswe evaluate our estimates, assumptions and judgments and make changesaccordingly. An accounting policy is deemed to be critical if it requires anaccounting estimate to be made based on assumptions about matters that arehighly uncertain at the time the estimate is made, if different estimatesreasonably could have been used, or if changes in the estimate that arereasonably likely to occur could materially impact the financialstatements.  We believe that theestimates, assumptions and judgments involved in revenue recognition,receivables and allowances for doubtful accounts, accruals including thirdparty commissions payable, restructuring liabilities, litigation and othercontingencies, stock-based compensation, product warranty, variable interestentities, inventories, deferred costs, research and development and capitalizedsoftware development costs, income taxes, impairment of intangible assets andlong-lived assets, and valuation 

 

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and impairment ofinvestments have the greatest potential impact on our Condensed ConsolidatedFinancial Statements, so we consider these to be our critical accountingpolicies.  Management believes that therehave been no significant changes during the six months ended June 30, 2009to the items that we disclosed as our critical accounting policies andestimates in Management’s Discussion and Analysis of Financial Condition andResults of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2008.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

For a description of thenew accounting standards that affect us, see Note 2 of Notes to ourCondensed Consolidated Financial Statements included under Part I,Item 1 of this Quarterly Report on Form 10-Q.

 

**RESULTSOF OPERATIONS**

 

To align thebusiness units with our corporate strategy to focus on core businesses, on July 1, 2008 we soldPCD to PCD LLC (see Note 3 of Notes to our Condensed ConsolidatedFinancial Statements included under Part I, Item 1 of this QuarterlyReport on Form 10-Q).  Prior to July 1,2008, PCD sold and supported handsets other than PAS handsets, mainly in theUnited States. Included in the Other segment are Mobile Solutions BusinessUnit (“MSBU”) and Custom Solutions Business Unit (“CSBU”).  On July 31, 2008, we sold MSBU which wasresponsible for the development, sales and service of our wireless IPCDMA/IPGSMproduct line. In the first quarter of 2009, we completed the wind-down of CSBUand the consolidation of voice messaging technology into our MultimediaCommunications segment. CSBU historically had been responsible for thedevelopment, sales and service of other non-core products. The consolidation ofvoice messaging technology into the Multimedia Communications segment did nothave a significant impact on segment net sales or gross profit. As a result ofthese changes we revised our internal reporting structure, operating segmentsand reporting segments.

 

Effective January 1,2009, the new reporting segments are as follows:

 

·                  Multimedia Communications—Focused ondevelopment and market opportunities in IPTV solutions and Wirelessinfrastructure technologies.

 

·                  Broadband Infrastructure—Focused on ourportfolio of broadband products.

 

·                  Handsets—Focused on mobile phone businesswith continued focus on the PAS and CDMA handset market, as well as data cardsmarkets. Handset sales to PCD LLC, which commenced after the July 1,2008 sale of PCD, are included in this segment.

 

·                  Services—Focused on providing services andsupport of our Broadband Infrastructure and Multimedia Communicationsproduct lines.

 

**NET SALES**

 
|                       |   | **Three months ended June 30,** |       | **Six months ended June 30,** |       |
|----------------------------|--------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
|                       |   | **2009**                                            | ** ** | **% of net  sales**                     | ** ** | **2008** | ** ** | **% of net  sales** | ** ** | **2009** | ** ** | **% of net  sales** | ** ** | **2008** | ** ** | **% of net  sales** |   |
|                       |   | **(in thousands)**                             |       |
| ***Net Sales by Segment*** |   |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Multimedia  Communications |   | $                                                   | 38,968     |                                              | 49         | % | $ | 74,018 |   | 12 | % | $ | 73,000 |   | 37 | % | $ | 141,464 |   | 12 | % |
| Broadband Infrastructure   |   | 13,583                                              |       | 17                                                | %          | 35,888 |   | 6 | % | 29,002 |   | 14 | % | 61,479 |   | 5 | % |
| Handsets                   |   | 13,184                                              |       | 16                                                | %          | 49,461 |   | 8 | % | 69,245 |   | 35 | % | 93,484 |   | 8 | % |
| Services                   |   | 14,428                                              |       | 18                                                | %          | 15,884 |   | 2 | % | 28,256 |   | 14 | % | 26,975 |   | 2 | % |
| PCD                        |   | —                                              |       | —                                            |       | 448,864 |   | 71 | % | — |   | — |   | 879,588 |   | 72 | % |
| Other                      |   | —                                              |       | —                                            |       | 8,641 |   | 1 | % | — |   | — |   | 15,755 |   | 1 | % |
|                       |   | $                                                   | 80,163     |                                              | 100        | % | $ | 632,756 |   | 100 | % | $ | 199,503 |   | 100 | % | $ | 1,218,745 |   | 100 | % |

 

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| ** **                | ** ** | **Three  months ended June 30,** | ** ** | **Six  months ended June 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | ** **                            | ** ** | **% of  net**                       | ** ** | ** ** | ** ** | **% of  net** | ** ** | ** ** | ** ** | **% of  net** | ** ** | ** ** | ** ** | **% of  net** | ** ** |
| ** **                | ** ** | **2009**                              | ** ** | **sales**                           | ** ** | **2008** | ** ** | **sales** | ** ** | **2009** | ** ** | **sales** | ** ** | **2008** | ** ** | **sales** | ** ** |
| ** **                | ** ** | **(in  thousands)**                   | ** ** |
| ***Net Sales by region*** | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States             |       | $                                     | 1,731      |                                | 2          | % | $ | 442,780 |   | 70 | % | $ | 42,990 |   | 21 | % | $ | 864,643 |   | 71 | % |
| China                     |       | 52,531                                |       | 66                                  | %          | 110,752 |   | 18 | % | 103,749 |   | 52 | % | 227,874 |   | 19 | % |
| India                     |       | 9,536                                 |       | 12                                  | %          | 5,399 |   | 1 | % | 19,120 |   | 10 | % | 12,836 |   | 1 | % |
| Other                     |       | 16,365                                |       | 20                                  | %          | 73,825 |   | 11 | % | 33,644 |   | 17 | % | 113,392 |   | 9 | % |
| Total net sales           |       | $                                     | 80,163     |                                | 100        | % | $ | 632,756 |   | 100 | % | $ | 199,503 |   | 100 | % | $ | 1,218,745 |   | 100 | % |

 

*Threemonths ended June 30, 2009 and 2008*

 

Net sales decreased by 87% to $80.2 million during the threemonths ended June 30, 2009 compared to the same period in 2008. Thedecrease was primarily due to disposal of PCD and MSBU in 2008 and disbandmentof the operations formerly included in the Other segment in the first quarterof 2009.  The PCD and Other segmentsaccounted for $457.5 million of the decrease.  Net sales for the segments other than the PCDand Other decreased by $95.1 million or 54%. Multimedia Communications net sales decreased by $35.1 million, or 47%, for the three months ended June 30,2009 compared to the same period in 2008, mainly due to continued weakeningdemand for our PAS Infrastructure products. Broadband Infrastructure segmentnet sales decreased by $22.3 million or 62% for the three months ended June 30,2009 compared to the same period in 2008 mainly due to decrease in Multi-ServiceAccess Node (“MSAN”),Multi-Service Transport Platform (“MSTP”) and CPE sales.  Handsets segment net sales decreased by $36.3 million, or 73%, in the second quarter of 2009 primarilydue the declines of our PAS handsets sales during the three months ended June 30,2009 partially offset by the increase of CDMA handsets sales in China.

 

*Six months ended June 30, 2009 and 2008*

 

Net sales decreased by 84% to $199.5 million during the sixmonths ended June 30, 2009 compared to the same period in 2008. Thedecrease was primarily due to disposal of PCD and MSBU in 2008 and disbandmentof the operations formerly included in the Other segment in the first quarterof 2009.  The PCD and Other segmentsaccounted for $895.3 million of the decrease.  Net sales for the segments other than the PCDand Other decreased by $123.9 million or 38%. Multimedia Communications net sales decreased by $68.5 million, or 48%, for the six months ended June 30,2009 compared to the same period in 2008, mainly due to continued weakeningdemand for our PAS Infrastructure products. Broadband Infrastructure segmentnet sales decreased by $32.5 million or 53% for the six months ended June 30,2009 compared to the same period in 2008 mainly due to decrease in MSAN, MSTPand CPE sales.  Handsets segment netsales decreased by $24.2 million, or 26%, in the first half of 2009 primarilydue to the declines of our PAS handsets sales partially offset by theincrease of CDMA handsets sales in China as well as CDMA handsets sales to PCDLLC.

 

For additionaldiscussion, see the “Segment Reporting” section of this Item 2.

 

The economic uncertainty that we are operating in today could adverselyimpact our business. However, the majority of our business is based in Chinaand India—two countries that are still projected to have economic growth in2009.  In 2009 and beyond, we expect acontinued decline in demand for our PAS handsets and infrastructure equipmentdue to the China telecommunications industry restructuring and launch of 3Gservices. We currently offer and have initial market acceptance of our IPTVproducts in China, India, Taiwan and other geographic regions. We believe thatthe IPTV market presents a meaningful growth opportunity in these regions aswell as other regions where we have targeted to expand our IPTV offerings.

 

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**GROSS(LOSS) PROFIT**

 
| ** **                           | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | ** **                            | ** ** | **Gross**                           | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                           | ** ** | **2009**                              | ** ** | **profit  %**                       | ** ** | **2008** | ** ** | **profit  %** | ** ** | **2009** | ** ** | **profit  %** | ** ** | **2008** | ** ** | **profit  %** | ** ** |
| ** **                           | ** ** | **(in  thousands)**                   | ** ** |
| ***Gross (loss) profit by Segment*** |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Multimedia Communications            |       | $                                     | 12,077     |                                | 31         | % | $ | 28,818 |   | 39 | % | $ | 22,630 |   | 31 | % | $ | 61,974 |   | 44 | % |
| Broadband Infrastructure             |       | 614                                   |       | 5                                   | %          | 1,669 |   | 5 | % | 2,234 |   | 8 | % | 3,890 |   | 6 | % |
| Handsets                             |       | (34,221                               | )          | (260                                | )%         | 6,781 |   | 14 | % | (27,919 | ) | (40 | )% | 22,996 |   | 25 | % |
| Services                             |       | 5,692                                 |       | 39                                  | %          | 4,794 |   | 30 | % | 8,869 |   | 31 | % | 7,113 |   | 26 | % |
| PCD                                  |       | —                                |       | —                              |       | 36,169 |   | 8 | % | — |   |   |   | 69,005 |   | 8 | % |
| Other                                |       | —                                |       | —                              |       | 3,717 |   | 43 | % | — |   |   |   | 9,049 |   | 57 | % |
| Total                                |       | $                                     | (15,838    | )                                   | (20        | )% | $ | 81,948 |   | 13 | % | $ | 5,814 |   | 3 | % | $ | 174,027 |   | 14 | % |

 

Cost of sales consistsprimarily of material and labor costs, including stock-based compensation,associated with manufacturing, assembly and testing of products, costsassociated with installation and customer training, warranty costs, fees toagents, inventory write-downs and overhead. Cost of sales also includes importtaxes and tariffs on components and assemblies. Some components and materialsused in our products are purchased from a single supplier or a limited group ofsuppliers and, in some cases, are subject to obtaining Chinese import permitsand approvals. We also rely on third party manufacturers to manufacture andassemble most of our CDMA handsets.

 

Our gross profit has beenaffected by average selling prices, material costs, product mix, the impact ofwarranty charges and contract loss provisions as well as inventory reserves andrelease of deferred revenues and related cost pertaining to prior years. Ourgross profit, as a percentage of net sales, varies among our product families.We expect that our overall gross profit, as a percentage of net sales, willfluctuate in the future as a result of shifts in product mix, stage of productlife cycle, anticipated decreases in average selling prices and our ability toreduce cost of sales.

 

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*Threemonths ended June 30, 2009 and 2008*

 

Gross profit was negative $15.8 million, or negative 20% of netsales, in the three months ended June 30, 2009, compared to$81.9 million, or 13% of net sales, in the corresponding period of 2008.The overall gross profit decrease in absolute dollars was primarily due to thedisposal of PCD and MSBU in 2008 and disbandment of operations formerlyincluded in the Other segment in the first quarter of 2009.  PCD and Other segments in aggregate accountedfor $39.9 milliondecrease in gross profit for the second quarter of 2009.  Gross profit for the segments other than PCDand Other segment decreased by $57.9 million for the three months ended June 30,2009 as compared to the corresponding period of 2008.  This decrease was mainly due to decrease insales, additional inventory reserves and claim settlementrelated to certain handsets sold to PCD LLC for the Handsets segment and decrease in sales ofhigher margin Multimedia Communications products during the second quarter of2009. For additional discussion, see “Segment Reporting” section of this Item2.

 

*Sixmonths ended June 30, 2009 and 2008*

 

Gross profit was $5.8 million, or 3% of net sales, for the six months ended June 30,2009, compared to $174.0 million, or 14% of net sales, in thecorresponding period of 2008. The overall gross profit decrease in absolutedollars was primarily due to the disposal of PCD and MSBU in 2008 anddisbandment of the operations formerly included in the Other segment in the first quarter of2009.  PCD and Other segments inaggregate accounted for $78.1 million decrease in gross profit for the first halfof 2009.  Gross profit for the segmentsother than PCD and Other decreased by $90.2 million for the six months ended June 30,2009 as compared to the corresponding period of 2008.  This decrease was due to increase in lowermargin CDMA handset sales to PCD LLC, decrease in sales, additional inventoryreserves and claim settlement related to certain handsets sold to PCD LLC for the Handsets segments, and decreasein sales of higher margin Multimedia Communications products during the firsthalf of 2009, partially offset by an $8.5 million decrease to cost of sales inthe Handsets segment resulting from the amortization of the Marvell supplyagreement during the first quarter of 2009 (See Note 3 of Notes to ourCondensed Consolidated Financial Statements included under Part I, Item 1of this Quarterly Report on Form 10-Q.)  Foradditional discussion, see “Segment Reporting” section of this Item 2.

 

**OPERATINGEXPENSES**

 

The following tablesummarizes our operating expenses:

 
| ** **                           | ** ** | **Three  months ended June 30,** | ** ** | **Six  months ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **2009**                              | ** ** | **% of  net  sales**                | ** ** | **2008** | ** ** | **% of  net  sales** | ** ** | **2009** | ** ** | **% of  net  sales** | ** ** | **2008** | ** ** | **% of  net  sales** | ** ** |
| ** **                           | ** ** | **(in  thousands)**                   | ** ** |
| Selling, general and  administrative |       | $                                     | 26,971     |                                | 34         | % | $ | 72,010 |   | 11 | % | $ | 81,151 |   | 41 | % | $ | 151,754 |   | 12 | % |
| Research and development             |       | 16,229                                |       | 20                                  | %          | 39,286 |   | 6 | % | 37,737 |   | 19 | % | 80,686 |   | 7 | % |
| Amortization of  intangible assets   |       | —                                |       | —                              |       | 1,730 |   | 0 | % | — |   | — |   | 3,554 |   | 0 | % |
| Restructuring                        |       | 27,757                                |       | 35                                  | %          | — |   | — |   | 32,576 |   | 16 | % | — |   | — |   |
| Gain on divestiture                  |       | (1,357                                | )          | (2                                  | )%         | — |   | — |   | (1,357 | ) | (1 | )% | — |   | — |   |
| Total net operating  expenses        |       | $                                     | 69,600     |                                | 87         | % | $ | 113,026 |   | 17 | % | $ | 150,107 |   | 75 | % | $ | 235,994 |   | 19 | % |

 

Selling, general andadministrative expenses (“SG&A”) include compensation and benefits, professionalfees, sales commissions, provision for doubtful accounts receivable and traveland entertainment costs. Research and development (“R&D”) expenses consistprimarily of compensation and benefits of employees engaged in research, designand development activities, costs of parts for prototypes, equipmentdepreciation and third party development expenses. We believe that continuedand prudent investment in research and development is critical to our long-termsuccess, and we will aggressively evaluate appropriate investment levels.  A portion of our costs are fixed and aredifficult to quickly reduce in periods of lower sales.

 

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*SELLING,GENERAL AND ADMINISTRATIVE*

 

*Three months ended June 30,2009 and 2008*

 

SG&A expenses were $27.0 million for the three months ended June 30,2009, a decrease of $45.0 million as compared to $72.0 million for the same period in 2008. Thedecrease in SG&A expense was primarily due toa $9.1 million decrease in SG&A expensesrelated to divested operations, primarily PCD and MSBU, a $10.6 million decrease in personnel relatedexpenses due to continuous streamlining of operations and recent cost reductionmeasures, a $2.6 million decrease in depreciation expense due to assets impairmentwrite off in 2008, a $2.0 million decrease in travel related expenses due to reducedtravel activity and cost containment efforts, a $2.7 million savings fromreduction in the use of outside services, a $2.2 million reduction inadvertising and marketing, sales promotions, as well as shows and exhibitsexpenses due to reduced sales activities; and a $10.5 million recovery ofdoubtful account as a result of increased effort in collection compared to $3.4million provision of doubtful accounts in the same period of 2008.

 

*Six months ended June 30,2009 and 2008*

 

SG&A expenses were $81.2 million for the six months ended June 30,2009, a decrease of $70.6 million as compared to $151.8 million for the same period in 2008. Thedecrease in SG&A expense was primarily due to a $16.7 million decrease in SG&A expensesrelated to divested operations, primarily PCD and MSBU, an $18.6 million decrease in personnel relatedexpenses due to continuous streamlining of operations and recent cost reductionmeasures, a $9.4 million reduction in legal and accounting fees as aresult of reduced activity in investigations and litigation, a $5.0 million decrease in depreciation expensedue to assets impairment write off in 2008, a $5.5 million savings from reduction in theuse of outside services, a $3.7 million decrease in travel related expenses due toreduced travel activity and cost containment efforts, a $3.4 million reductionin advertising and marketing, sales promotions, as well as shows and exhibitsexpenses due to reduced sales activities, and a $2.1 million recovery ofdoubtful account compared to $2.6 million provision of doubtful accounts in thesame period of 2008.

 

*RESEARCHAND DEVELOPMENT*

 

*Threemonths ended June 30, 2009 and 2008*

 

R&D expensesdecreased by $23.1 million during the three months ended June 30,2009 compared to the same period in 2008. During the second half of 2008, we sold PCD and MSBU which resulted inaggregated R&D savings of $4.7 million for the second quarter of 2009.  In addition, the decrease was also due to a $11.7 million decrease in personnel relatedexpenses as we continued to streamline our R&D operations and reducedspending in non-core business units, a $3.8 millionsavings from reduction in use of outside services due to wind-down of the Koreaoperation, a $1.1 milliondecrease in travelrelated expenses due to reduced travel activity and a $0.9 million decrease in facility related expense.

 

*Sixmonths ended June 30, 2009 and 2008*

 

R&D expensesdecreased by $42.9 million during the six months ended June 30,2009 compared to the same period in 2008. During the second half of 2008, we sold PCD and MSBU which resulted inaggregated R&D savings of $9.4 million for the first half of 2009.  In addition, the decrease was also due to a $21.6 million decrease in personnel relatedexpenses as we continued to streamline our R&D operations and reducedspending in non-core business units, a $4.9 millionsavings from reduction in use of outside services primarily due to wind-down ofthe Korea operation, a $1.9 milliondecrease in travelrelated expenses due to reduced travel activity, a $1.7 million decrease in facility related expense, a $1.4 million decrease in depreciation and a$2.4 million decrease in software license and part expenses as wecontinued to streamline our operations.

 

*AMORTIZATIONOF INTANGIBLE ASSETS*

 

*Threemonths and six months ended June 30, 2009 and 2008*

 

There was no amortizationof intangible assets in the three and six months ended June 30, 2009compared to $1.7 million and $3.6 million in the three and six monthsended June 30, 2008, respectively. An impairment charge of $4.9 millionwas recorded in the fourth quarter of 2008 to fully write-off the remainingcarrying value of intangible assets at December 31, 2008.

 

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*RESTRUCTURING*

 

*Threeand six months ended June 30, 2009*

 

Forthe three and six months ended June 30, 2009, we recorded restructuringcharges of $27.8 million and $32.6 million, respectively.  No restructuring charges were recorded in thecomparable periods in 2008. We expect to incur additional restructuring charges over the nexttwelve months as we continue toexecute the 2009 and 2008 Restructuring Plans.  The following describes our restructuring initiatives.

 

*2009 Restructuring Plan*

 

On June 9, 2009, ourBoard of Directors approved a restructuring plan (the “2009 Restructuring Plan”)designed to reduce our operating costs.  The 2009 Restructuring Planincludes a worldwide reduction in force of approximately 50% of our headcount,or approximately 2,300 employees located primarily in China and theUnited States and, to a lesser degree, other international locations.   During the second quarter of2009, we recorded a restructuring charge of approximately $25.9 million relatedto the 2009 Restructuring Plan, including $24.7 million for severance andbenefits related to approximately 1,850 employees and $1.2 million related tothe estimated loss on a lease obligation which expires in 2013.

 

*2008 Restructuring Plan*

 

During fiscal 2008, we implemented arestructuring plan (the “2008 Restructuring Plan”) and recorded $13.1 millionin restructuring charges primarily related to a global reduction in forceacross all functions and employee terminations at certain non-core operationswhich we are in the process of winding down. During the three and six monthsended June 30, 2009, we recorded restructuring charges related to the 2008Restructuring Plan of approximately $1.8 million and $6.4 million,respectively. The charges for the six months ended June 30, 2009 consistprimarily of severance and benefits related to the transition of certain keyfunctions, including finance, to China and lease costs related to a leaseobligation which expires in fiscal year 2010. Approximately 60 employees areaffected by the transition of these key functions to China.

 

*2007 Restructuring Plan*

 

At June 30, 2009 the restructuring accrual for the 2007 Planincluded within other liabilities of approximately $0.7 million was related toa lease obligation which expires in fiscal year 2010.

 

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The activity inthe accrued restructuring balances related to the plans described above was asfollows for the six months ended June 30, 2009:

 
| ** **                             | ** ** | **Balance at  December 31,  2008** | ** **   | **Restructuring  Charges** | ** ** | **Cash Payments** | ** ** | **Non-cash  Settlement** | ** **   | **Balance at June  30, 2009** | ** ** |
|----------------------------------------|------------|-----------------------------------------|--------------|----------------------------|------------|-------------------|------------|--------------------------|--------------|-------------------------------|------------|
| ** **                             | ** ** | **(in thousands)**                      | ** **   |
| 2009 Restructuring Plan                |       |                                    |         |                       |       |              |       |                     |         |                          |       |
| Worforce Reduction                     |       | $                                       |  — |                       | $          |  24,715      |       | $                        |  (1,070 | )                             | $          |  (417 | ) | $ |  23,228 |   |
| Lease Costs                            |       | —                                  |         | 1,223                      |       | —            | ** ** | **—**               |         | 1,223                         |       |
| Other Costs                            |       | —                                  |         | 7                          |       | (7                | )          | —                   |         | —                        |       |
| Total 2009  Restructuring Plan         |       | —                                  |         | 25,945                     |       | (1,077            | )          | (417                     | )            | 24,451                        |       |
|                                   |       |                                    |         |                       |       |              |       |                     |         |                          |       |
| 2008 Restructuring Plan                |       |                                    |         |                       |       |              |       |                     |         |                          |       |
| Worforce Reduction                     |       | 7,976                                   |         | 5,377                      |       | (7,569            | )          | (380                     | )            | 5,404                         |       |
| Lease Costs                            |       | 249                                     |         | 1,114                      |       | (467              | )          | **—**               |         | 896                           |       |
| Other Costs                            |       | 498                                     |         | (64                        | )          | (247              | )          | —                   |         | 187                           |       |
| Total 2008  Restructuring Plan         |       | 8,723                                   |         | 6,427                      |       | (8,283            | )          | (380                     | )            | 6,487                         |       |
|                                   |       |                                    |         |                       |       |              |       |                     |         |                          |       |
| 2007 Restructuring Plan  - Lease Costs |       | 788                                     |         | 204                        |       | (321              | )          | —                   |         | 671                           |       |
|                                   |       |                                    |         |                       |       |              |       |                     |         |                          |       |
| Total                                  |       | $                                       |  9,511  |                       | $          |  32,576      |       | $                        |  (9,681 | )                             | $          |  (797 | ) | $ |  31,609 |   |

 

The following table showsthe total amount of costs incurred by segment in connection with therestructuring plans:

 
| ** **                            | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | **2009**                              | ** ** | **2009**                            | ** ** |
| ** **                            | ** ** | **(in thousands)**                    | ** ** |
| Multimedia  Communications            |       | $                                     | 5,544      |                                | $          | 5,467 |   |
| Broadband  Infrastructure             |       | 3,278                                 |       | 3,280                               |       |
| Handsets                              |       | 931                                   |       | 1,765                               |       |
| Services                              |       | 1,752                                 |       | 3,463                               |       |
| Total restructuring  costs by segment |       | 11,505                                |       | 13,975                              |       |
| General and Corporate                 |       | 16,252                                |       | 18,601                              |       |
| Total restructuring  costs            |       | $                                     | 27,757     |                                | $          | 32,576 |   |

 

The majority of the cashexpenditures related to the 2009 and 2008 Restructuring Plans are expected tobe paid in the third and fourth quarters of 2009, with lesser amounts expectedto be paid in the first two quarters of 2010. The remaining liabilities related to lease obligations are expected tobe settled over the remaining lease term.

 

*GAIN ON DIVESTITURE*

 

*Threeand six months ended June 30, 2009*

 

Gainon divestiture for the three and six months ended June 30, 2009 iscomprised of an additional $1.4 million gain on sale of PCD assetsresulting from an adjustment to reflect actual transaction-related costs.

 

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**OTHER INCOME (EXPENSE)**

 

*INTERESTINCOME*

 

*Threeand six months ended June 30, 2009 and 2008*

 

Interest income was$0.6 million and $1.3 million for the three months ended June 30,2009 and 2008, respectively. Interest income was $1.3 million and $4.1million for the six months ended June 30, 2009 and 2008, respectively.Interest income decreased in the three and six months ended June 30, 2009compared to the same periods in 2008 primarily due to a decline in the averageinterest rate.

 

*INTERESTEXPENSE*

 

*Threeand six months ended June 30, 2009 and 2008*

 

Interest expense was $0.2 million and$3.5 million for the three months ended June 30, 2009 and 2008,respectively. Interest expense was $0.5 million and $9.5 million for thesix months ended June 30, 2009 and 2008, respectively. The decrease ininterest expense for the three and six months ended June 30, 2009 comparedto the same period in 2008 was primarily attributable to the repayment of$274.6 million of convertible subordinated notes due March 1, 2008 and$48.0 million of other bank loan repayments during 2008. Interest expense for the three monthsended June 30, 2008 included approximately $2.5 million of debt issuancecosts related to a secured revolving credit facility.

 

*OTHERINCOME (EXPENSE), NET*

 

*Threemonths ended June 30, 2009 and 2008*

 

Other income, net was$5.4 million for the three months ended June 30, 2009 as compared toother expense, net of $0.9 million for the three months ended June 30,2008. Other income, net of $5.4 million for the three months ended June 30,2009 consisted primarily of $9.0 of foreign currency gains, offset partially bya $3.8 million other-than-temporary impairment of an equity investment.  Other expense, net of $0.9 million for thethree months ended June 30, 2008 consisted primarily of foreign currencylosses.

 

S*ix months ended June 30, 2009 and 2008*

 

Other expense, net forthe six months ended June 30, 2009 was $1.8 million as compared to incomeof $53.1 million for the six months ended June 30, 2008. Other expense,net for the six months ended June 30, 2009 consisted primarily of a $3.8million other-than-temporary impairment of an equity investment, offsetpartially by foreign currency gains of $1.7 million. Other income, net for thesix months ended June 30, 2008 was primarily due to a $32.4 million gainon the sale of the Gemdale investment, a $7.3 million gain on the sale of theInfinera investment, an $8.2 million gain on the liquidation of investment in avariable interest entity and a $4.1 million gain on foreign currencyrevaluation.

 

*INCOMETAX EXPENSE*

 

Income tax expense isbased upon a blended effective tax rate based upon our expectation of theamount of income to be earned in each tax jurisdiction and is accounted underthe liability method. Deferred income taxes are recognized for the differencesbetween the tax bases of assets and liabilities and their financial statementamounts based on enacted tax rates. Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be realized.We expect to maintain a full valuation allowance on our remaining net deferredtax assets until an appropriate level of profitability that generates taxableincome is sustained or until we are able to develop tax strategies that wouldenable us to conclude that it is more likely than not that a portion of ourdeferred tax assets will be realizable. Any reversal of valuation allowanceswill favorably impact our results of operations in the period of the reversal.

 

We adopted the provisionsof FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes-an interpretation of FASB Statement No. 109” (FIN 48) on January 1,2007. FIN 48 established criteria for recognizing or continuing to recognizeonly more-likely-than-not tax positions, which may result in income tax expensevolatility in future periods. While we believe that we have adequately providedfor all tax positions, amounts asserted by taxing authorities could be greaterthan our accrued position. Accordingly, additional provisions on income taxrelated matters could be recorded in the future as revised estimates are madeor the underlying matters are settled or otherwise resolved.

 

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*Threemonths ended June 30, 2009 and 2008*

 

Income tax expense was$4.7 million for the three months ended June 30, 2009 compared to a taxexpense of $4.6 million for the three months ended June 30, 2008. During thesecond quarter of 2009, we made an assessment of the realizability of ourdeferred tax assets in Korea, which are included in our Handsets segment, andwe believe that it will not generate sufficient income to realize its deferredtax assets in Korea.  Therefore, weestablished a valuation allowance on our remaining net deferred tax assets inKorea.  The income tax expense associatedwith establishing the valuation allowance is $1.4 million.

 

*Six months ended June 30,2009 and 2008*

 

Income tax expense was$6.5 million for the six months ended June 30, 2009 compared to a taxbenefit of $0.4 million for the six months ended June 30, 2008. Income taxexpense for the six months ended June 30, 2009 also included a firstquarter tax benefit of $2.8 million related to the recognition of previouslyunrecognized tax benefits and the reversal of interest and penalties due tostatute of limitations expirations and income tax audit settlements. The ChinaCorporate Income Tax Law (“CIT Law”) was effective on January 1,2008.  As a result of the enactment ofregulations during the first quarter of 2008 which addressed CIT Law, werecorded an income tax benefit of $11.7 million related to reversing a deferredtax liability on foreign withholding taxes related to the unremitted earningsof our subsidiaries which we determined to not be permanently reinvestedoutside the United States.  We also accrued$3.2 million of foreign withholding taxes related to the realized gain on thesale of our investment in Gemdale.

 

For 2009 and 2008, wehave not provided any tax benefit on any forecasted losses incurred and taxcredits generated in the United States and other countries, because we believethat it is more likely than not that the tax benefit associated with theselosses will not be realized. Also, for 2009 and 2008, we continue to accrue taxexpense in jurisdictions where we have been historically profitable. Estimatesof the annual effective tax rate at the end of the interim periods are based onevaluations of possible future events and transactions and may be subject tosubsequent refinement or revision.

 

**SEGMENTREPORTING**

 

Summarized below are oursegment net sales revenue and gross profit for the three and six months ended June 30,2009 and 2008, respectively.

 

***MultimediaCommunications***

*** ***
|                                       |   | **Three months ended June 30,** |       | **Six months ended June 30,** |       |
|--------------------------------------------|--------|--------------------------------------|------------|------------------------------------|------------|
|                                       |   | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** |   |
|                                       |   | **(in thousands)**                   |       |
| Net sales                                  |   | $                                    | 38,968     |                               | $          | 74,018 |   | $ | 73,000 |   | $ | 141,464 |   |
| Gross profit                               |   | $                                    | 12,077     |                               | $          | 28,818 |   | $ | 22,630 |   | $ | 61,974 |   |
| Gross profit as a  percentage of net sales |   | 31                                   | %          | 39                                 | %          | 31 | % | 44 | % |

 

During the three monthsended June 30, 2009, sales of Multimedia Communications segment decreased by47% or $35.1million as compared to the same period in 2008. The decrease was primarily due to the decrease in PAS equipment sales by77% as well as decrease in sales of Set Top Box (“STB”)  products partially offset by increase in salesof IPTV system products.  PAS equipmentsales comprised approximately 27% and 62% of our Multimedia Communicationssales for the three months ended June 30, 2009 and 2008, respectively.

 

Sales for the six monthsended June 30, 2009 decreased by 48% or $68.5 million. The decrease was mainly due to the declines of our PAS equipment salesby 81% partiallyoffset by increase in sales of IPTV system and STB products.  PAS equipment sales comprised approximately25% and 68% of our Multimedia Communications sales for the six months ended June 30,2009 and 2008, respectively.

 

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The gross profitpercentage decreased to 31% for both three and six months ended June 30,2009 from 39% and 44% for the corresponding periods in 2008.  The decrease was primarily due to decreasedsales of our higher margin PAS infrastructure equipment.

 

We expect future PAS infrastructure spending to decline rapidly in 2009and beyond as China launched its 3G networks. We plan to aggressively pursue opportunities for our IPTV productportfolios and in multiple markets. However, we do not anticipate that thesesales will fully offset the anticipated decline in PAS sales in 2009and beyond.

 

Webelieve that the IPTV market presents a meaningful growth opportunity. Wecurrently offer and have initial market acceptance of our IPTV products inChina, India, Taiwan and other geographic regions.

 

***BroadbandInfrastructure***

*** ***
|                                       |   | **Three months ended June 30,** |         | **Six months ended June 30,** |       |
|--------------------------------------------|--------|--------------------------------------|--------------|------------------------------------|------------|
|                                       |   | **2009**                             | ** **   | **2008**                           | ** ** | **2009** | ** ** | **2008** |   |
|                                       |   | **(in thousands)**                   |         |
| Net sales                                  |   | $                                    |  13,583 |                               | $          |  35,888 |   | $ |  29,002 |   | $ |  61,479 |   |
| Gross profit                               |   | $                                    |  614    |                               | $          |  1,669 |   | $ |  2,234 |   | $ |  3,890 |   |
| Gross profit as a  percentage of net sales |   | 5                                    | %            | 5                                  | %          | 8 | % | 6 | % |

 

Broadband Infrastructuresales decreased by 62% and 53% respectively during the three and six monthsended June 30, 2009, respectively, as compared to the same periods in2008.  The decrease was mainly due tolower MSAN, MSTP and CPE sales in 2009. Softbank in Japan, one of our largest infrastructure customers,represented approximately 13% and 17% of total Broadband sales during the threemonths ended June 30, 2009 and 2008, respectively and 14% and 25% duringthe six months ended June 30, 2009 and 2008, respectively.

 

Gross profit percentageremained stable at 5% for the three months ended June 30, 2009 and2008.  Gross profit percentage increasedfrom 6% for the six months ended June 30, 2008 to 8% for the correspondingperiod in 2009.  The increase wasprimarily due to decrease in provision for anticipated losses on infrastructurecontracts in 2009.

 

We may incur additionalwarranty expense and inventory reserves as we introduce new products and may berequired to accrue additional contract losses for certain fixed price contractsas these contracts progress. These factors will result in negative impacts onour future gross margins, results of operations and financial position.

 

***Handsets***

*** ***
| ** **                                        | ** ** | **Three months ended June 30,** | ** **    | **Six months ended June 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|---------------|------------------------------------|------------|
| ** **                                        | ** ** | **2009**                             | ** **    | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                        | ** ** | **(in thousands)**                   | ** **    |
| Net sales                                         |       | $                                    |  13,184  |                               | $          |  49,461 |   | $ |  69,245 |   | $ |  93,484 |   |
| Gross (loss) profit                               |       | $                                    |  (34,221 | )                                  | $          |  6,781 |   | $ |  (27,919 | ) | $ |  22,996 |   |
| Gross (loss) profit as  a percentage of net sales |       | (260                                 | )%            | 14                                 | %          | (40 | )% | 25 | % |

 

Net sales decreased by 73% for the three months ended June 30,2009 compared to the same period in 2008. The decrease wasprimarily due to the declines of PAS business partially offset by the increaseof CDMA sales in China during the quarter. The sale of PAS handsets accounted for 57% and 87% of total handsetsales for the three months ended June 30, 2009 and 2008, respectively.

 

Net sales decreased by 26% for the six months ended June 30,2009 compared to the same periods in 2008. The decrease wasprimarily due to the declines of PAS business partially offset by the increaseof CDMA sales in China and 

 

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CDMA sales to PCD LLC inthe first half of 2009.  The sale of PAShandsets accounted for 27% and 89% of total handset sales for the six monthsended June 30, 2009 and 2008, respectively.  Our PAS handset sales declined significantlysince the first quarter of 2009 as China moved toward the 3G networkdeployment.

 

Gross profit as apercentage of net sales decreased from 14% for the three months ended June 30,2008 to negative 260% for the corresponding period in 2009. The decrease wasmainly due to inventory clearing sales of PAS and CDMA handsets at very low margins,as well as $5.7 million inventory reserves for CDMA and TDSCDMA handsets inChina.  In addition, gross profit was also reduced by approximately $28.7million as a result of transactions with PCD LLC consisting of a claimsettlement of $11.1 million for product-related liability disputes andproduct returns and $17.6 million of costs for inventory write-downs to netrealizable value, write-downs of excess inventory and warranty reserves.

 

Gross profit as apercentage of net sales decreased from 25% for the six months ended June 30,2008 to negative 40% for the corresponding period in 2009. The decrease wasmainly due to inventory clearing sales of PAS and CDMA handsets at very lowmargins, additional inventory reserves of PAS, CDMA and TDSCDMA handsets inChina and increased CDMA handset sales to PCD LLC which have lower profitmargins during the first half of 2009.  In addition, gross profit was alsoreduced by approximately $30.0 million as a result of transactions with PCD LLCconsisting of a claim settlement of $11.1 million for product-related liabilitydisputes and product returns and $18.9 million of costs for inventorywrite-downs to net realizable value, write-downs of excess inventory andwarranty reserves.

 

In 2009 and beyond, we expect an accelerated decline in PAS subscribersas the China telecommunication industry reorganizes and launches 3G services.

 

***Services***

*** ***
| ** **                                 | ** ** | **Three months ended June 30,** | ** **   | **Six months ended June 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------|--------------|------------------------------------|------------|
| ** **                                 | ** ** | **2009**                             | ** **   | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                   | ** **   |
| Net sales                                  |       | $                                    |  14,428 |                               | $          |  15,884 |   | $ |  28,256 |   | $ |  26,975 |   |
| Gross profit                               |       | $                                    |  5,692  |                               | $          |  4,794 |   | $ |  8,869 |   | $ |  7,113 |   |
| Gross profit as a  percentage of net sales |       | 39                                   | %            | 30                                 | %          | 31 | % | 26 | % |

 

Our Services segment’srevenue decreased by 9% and increased by 5% for the three and six monthsended June 30, 2009, respectively as compared to the corresponding periodsin 2008.  The decrease for the threemonths ended June 30, 2009 was mainly due to lower China service salesresulting from China telecommunication restructuring.  The increase for the first half of the yearwas due to higher international maintenance service revenue partially offset bythe decrease in China service sales.

 

Gross profit as apercentage of net sales increased from 30% and 26% for the three and six monthsended June 30, 2008, respectively, to 39% and 31% for the correspondingperiods in 2009, respectively.  Theincrease was primarily due to overall cost reduction efforts in both China andInternational service divisions.

 

***Personal Communication Devices (PCD)***

*** ***
| ** **                                 | ** ** | **Three months ended June 30,** | ** **   | **Six months ended June 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------|--------------|------------------------------------|------------|
| ** **                                 | ** ** | **2009**                             | ** **   | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                   | ** **   |
| Net sales                                  |       | $                                    |  — |                               | $          |  448,864 |   | $ |  — |   | $ |  879,588 |   |
| Gross profit                               |       | $                                    |  — |                               | $          |  36,169 |   | $ |  — |   | $ |  69,005 |   |
| Gross profit as a  percentage of net sales |       |                                 |         | 8                                  | %          |   |   | 8 | % |

 

On July 1, 2008, wesold our PCD operations (See Note 3 of Notes to our Condensed ConsolidatedFinancial Statements included under Part I, Item 1 of this QuarterlyReport on Form 10-Q).

 

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***Other***

*** ***
| ** **                                 | ** ** | **Three months ended June 30,** | ** **   | **Six months ended June 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------|--------------|------------------------------------|------------|
| ** **                                 | ** ** | **2009**                             | ** **   | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                   | ** **   |
| Net sales                                  |       | $                                    |  — |                               | $          |  8,641 |   | $ |  — |   | $ |  15,755 |   |
| Gross profit                               |       | $                                    |  — |                               | $          |  3,717 |   | $ |  — |   | $ |  9,049 |   |
| Gross profit as a  percentage of net sales |       | —                               |         | 43                                 | %          | — |   | 57 | % |

 

OurOther segment consists of Mobile Solutions (“MSBU”) and Custom Solutions (“CSBU”)business units.  We disposed of our MSBU unit in July 2008and completed the disbandment of the CSBU unit in the first quarter of2009.  The remaining IP Messaging productline has been integrated into the Multimedia Communication segment andremaining services related contracts have been integrated into the Servicesegment.

 

**RELATEDPARTY TRANSACTIONS**

 

*Softbankand affiliates*

 

We recognize revenue withrespect to sales of telecommunications equipment to affiliates of Softbank, asignificant stockholder of the Company. Softbank offers ADSL coveragethroughout Japan, which is marketed under the name “YAHOO! BB.” We supportSoftbank’s fiber-to-the-home service through sales of our carrier class GEPONproduct as well as our NetRingÔ product. In addition, we supportSoftbank’s new internet protocol television (“IPTV”), through sales of ourRollingStreamÔ product. We recognized revenue for salesof telecommunications equipment and services to affiliates of Softbank of $5.0million and $9.4 million, respectively, during the three months ended June 30,2009 and 2008, and $11.2 million and $21.2 million, respectively, during thesix months ended June 30, 2009 and 2008.

 

Included in accountsreceivable at June 30, 2009 and December 31, 2008 were $5.6 millionand $9.2 million, respectively, related to these transactions. We hadimmaterial amounts of accounts payable to Softbank and its affiliates at June 30,2009 and December 31, 2008.

 

Sales to Softbank includea three year service period and a penalty clause if product failure ratesexceed a certain level over a seven year period. As of June 30, 2009 and December 31,2008, our customer advance balance related to Softbank agreements was $0.8million and $0.7 million, respectively. The current deferred revenue balance related to Softbank was $2.0million and $4.0 million as of June 30, 2009 and December 31, 2008,respectively.  As of June 30, 2009,our noncurrent deferred revenue balance related to Softbank was $9.0 millioncompared to $9.2 million as of December 31, 2008.

 

As of June 30, 2009,Softbank beneficially owned approximately 12% of our outstanding stock.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

**Liquidity and Capital Resources**

 

The following sections discuss the effects ofchanges in our balance sheet and cash flows, contractual obligations and othercommitments on our liquidity and capital resources.

 

***Balance Sheet and Cash Flows***

 

Cashand Cash Equivalents and Short-term Investments

 
| ** **                           | ** ** | **June 30,**   | ** **    | **December 31,** | ** ** | ** **    | ** ** |
|--------------------------------------|------------|---------------------|---------------|-----------------------|------------|---------------|------------|
| ** **                           | ** ** | **2009**            | ** **    | **2008**              | ** ** | **Change**    | ** ** |
| ** **                           | ** ** | **(in  thousands)** | ** **    |
|                                 |       |                |          |                  |       |          |       |
| Cash and cash  equivalents           |       | $                   |  272,596 |                  | $          |  309,603 |       | $ |  (37,007 | ) |
| Short-term investments  - Bank notes |       | 3,448               |          | 4,262                 |       | (814          | )          |
| Total                                |       | $                   |  276,044 |                  | $          |  313,865 |       | $ |  (37,821 | ) |

 
| ** **                                                    | ** ** | **Six  months ended June 30,** | ** **    |
|---------------------------------------------------------------|------------|------------------------------------------|---------------|
| ** **                                                    | ** ** | **2009**                                 | ** **    | **2008** | ** ** | **Change** | ** ** |
| ** **                                                    | ** ** | **(in  thousands)**                      | ** **    |
| Cash (used in) provided  by operating activities              |       | $                                        |  (37,136 | ) | $ |  58,348 |   | $ |  (95,484 | ) |
| Cash provided by  investing activities                        |       | 1,267                                    |          | 46,863 |   | (45,596 | ) |
| Cash used in financing  activities                            |       | (389                                     | )             | (299,654 | ) | 299,265 |   |
| Effect of exchange rate  changes on cash and cash equivalents |       | (749                                     | )             | 10,895 |   | (11,644 | ) |
|                                                          |       |                                     |          |   |   |   |   |
| Net decrease in cash  and cash equivalents                    |       | $                                        |  (37,007 | ) | $ |  (183,548 | ) | $ |  146,541 |   |

 

Cash and cash equivalents, consistingprimarily of bank deposits and money market funds, are recorded at cost whichapproximates fair value because of the short-term nature of theseinstruments. At June 30,2009, cash and cash equivalents approximating $122.9 million was held by oursubsidiaries in China.

 

Cashused in operating activities during the six months ended June 30, 2009 of$37.1 million resulted primarily from the net lossof $151.7 million offset by non-cash charges including $6.9 million ofdepreciation and amortization, $6.4 million stock-based compensation and alsooffset by changes in operating assets and liabilities providing net cash of $100.3 million. The decrease in sales activity in the first six months of 2009 was theprimary driver of the changes in operating assets and liabilities.  Cash from operations benefited $96.3 millionfrom a decrease in accounts receivable, $30.6 million from a decrease in inventory and deferred costs, $61.1 million from a decrease in other assetsconsisting primarily of working capital items, $33.6 million from an increasein customer advances and $17.1 million from an increase in other liabilities,offset partially by a decrease in accounts payable using cash of $119.4 million and a decrease in deferred revenueof $21.1million.   Cashprovided by operating activities during the six months ended June 30, 2008of $58.3 million wassignificantly impacted by changes in net operating assets and liabilitiesproviding net cash $88.0million, primarily as a result of management of working capital in the firstquarter of 2008 in preparation for the repayment of the convertiblesubordinated notes due March 1, 2008.

 

Cash provided by investing activities during thesix months ended June 30, 2009 and 2008 was $1.3 million and $46.9million, respectively. No significant investing activities occurred in the sixmonths ended June 30, 2009. Net cash provided by investing activities for the sixmonths ended June 30, 2008 included cash inflows of $66.6 millionfrom the proceeds of the sale of short-term investments and $7.7 million fromthe repayment of a loan by a variable interest entity, partially offset by cashoutflows of $10.8 million for the purchase of short-term and long-terminvestments, $10.3 million for the purchase of property, plant and equipmentand $6.5 million was the result of an increase in restricted cash, primarily tocollateralize letters of credit.

 

Cash used in financingwas $0.4 million during the six months ended June 30, 2009. Cash used infinancing activities was $299.7 million during the six months ended June 30,2008, primarily due to the repayment of the convertible subordinated notes of $274.6million due March 1, 2008 and the net repayment of $21.4 million of otherbank loans.

 

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Accounts Receivable, Net

 

The followingtable summarizes our accounts receivable, net (in thousands):

 
| ** **                            | ** ** | **June 30,**   | ** **   | **December 31,** | ** ** | **Increase**   | ** ** |
|---------------------------------------|------------|---------------------|--------------|-----------------------|------------|----------------|------------|
| ** **                            | ** ** | **2009**            | ** **   | **2008**              | ** ** | **(Decrease)** | ** ** |
| ** **                            | ** ** | **(in  thousands)** | ** **   |
|                                  |       |                |         |                  |       |           |       |
| Accounts receivable,  net             |       | $                   |  59,084 |                  | $          |  149,210  |       | $ |  (90,126 | ) |
| Accounts receivable,  related parties |       | 5,572               |         | 9,166                 |       | (3,594         | )          |
| Total accounts  receivable            |       | $                   |  64,656 |                  | $          |  158,376  |       | $ |  (93,720 | ) |

 

Accounts receivabledecreased $93.7 million primarily due to the decrease in sales in the first sixmonths of 2009. We recorded netrecoveries of doubtful accounts of approximately $10.5 million and $2.1 millionduring the three and six months ended June 30, 2009, respectively,primarily due to significant collection of long-aged receivables during thesecond quarter of 2009, partially offset by provision for doubtful accounts.

 

Inventories and DeferredCosts

 

The following table summarizes our inventories anddeferred costs:

 
| ** **                 | ** ** | **June 30,**   | ** **    | **December 31,** | ** ** | **Increase**   | ** ** |
|----------------------------|------------|---------------------|---------------|-----------------------|------------|----------------|------------|
| ** **                 | ** ** | **2009**            | ** **    | **2008**              | ** ** | **(Decrease)** | ** ** |
| ** **                 | ** ** | **(in  thousands)** | ** **    |
| Inventories:               |       |                |          |                  |       |           |       |
| Raw materials              |       | $                   |  12,560  |                  | $          |  15,545   |       | $ |  (2,985 | ) |
| Work in-process            |       | 17,019              |          | 33,524                |       | (16,505        | )          |
| Finished goods             |       | 158,021             |          | 140,763               |       | 17,258         |       |
| Total inventories          |       | $                   |  187,600 |                  | $          |  189,832  |       | $ |  (2,232 | ) |
|                       |       |                |          |                  |       |           |       |
| Short-term deferred  costs |       | $                   |  102,895 |                  | $          |  114,884  |       | $ |  (11,989 | ) |
| Long-term deferred  costs  |       | $                   |  135,540 |                  | $          |  149,258  |       | $ |  (13,718 | ) |

 

Inventoriesconsist of product held at our manufacturing facility and warehouses, as wellas finished goods at customer sites for which the customer has takenpossession, but based on specific contractual terms, title has not yet passedto the customer. Finished goods at customer sites were approximately $149.2million and $138.0 million at June 30, 2009 and December 31, 2008,respectively. Deferred costs consist of product shipped to the customer wherethe rights and obligations of ownership have passed to the customer, butrevenue has not yet been recognized.

 

Debt

 

Wehad no bank loans outstanding at June 30, 2009. At June 30,2009, our primary source of available credit was a series of creditfacilities in China. These credit facilities provide uncollateralized lines ofcredit totaling $131.7 million of which $43.9 million was available for workingcapital draws and $87.8 million for the issuance of letters of credit andcorporate guarantees (“non-working capital draws”) at June 30, 2009. These credit facilities provide anadditional $190.3 million in additional borrowing availability subject tocollateralization, of which $117.1 million was available for working capitaldraws and $73.2 million was available for non-working capital draws at June 30, 2009. At June 30, 2009, we hadapproximately $299.4 million available for future borrowings on these Chinacredit facilities, of which an aggregate of $161.0 million remained availablefor general working capital purposes and $138.4 million remained available insupport of letters of credit and corporate guarantees.  Approximately $263.5 million of thesefacilities expire during the third quarter of 2009 and approximately $58.5million of these lines expire in the fourth quarter of 2009.

 

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Our availablelines of credit in China are now significantly less than what has beenavailable to us historically and, if not renewed, expire within the next 6 months.  During the fourth quarter of 2007, creditfacilities in China in the aggregate amount of approximately$481.7 million matured or were extinguished. While we were able to renewapproximately $263.5 million of these lines of credit during the third quarterof 2008 and an additional $58.5 million of these lines of credit during thefirst quarter of 2009, borrowings above a certain threshold now requirecollateralization of our real property in China and each borrowing under thecredit facilities is subject to the banks’ then current favorable opinion ofthe credit worthiness of our China subsidiaries, as well as the bank havingfunds available for lending and other Chinese banking regulations andpractices. Furthermore, we have not previously utilized collateralized creditlines in China, and it is uncertain whether these collateralized credit lineswould be readily available to us.  Themost significant factor resulting in the decrease in our currently available linesof credit in China is the reduced profitability of our China domiciledsubsidiaries. We also believe that the decrease in our currently availablelines of credit in China is the result of recent changes in banking practicesin China which has resulted in the granting of lines of credit by China banksmore in line with U.S. and international credit underwriting practices. Uponexpiration in second half of 2009, we cannot be certain that additional linesof credit will be available to us on commercially reasonable terms or at all.

 

***Liquidity***

 

We incurred net losses of $150.3 million, $195.6 million and $117.3million during the years ended December 31, 2008, 2007 and 2006,respectively. During the six months ended June 30, 2009 we incurred a netloss of $151.7 million. We recorded operating losses in 17 of the 18consecutive quarters in the period ended June 30, 2009. At June 30,2009 we had an accumulated deficit of $993.2 million. We incurred net cashoutflows from operations of $55.2 million and $225.1 million in 2008 and 2007respectively. Cash used in operations was $37.1 million during the six monthsended June 30, 2009.  At June 30,2009, we had cash and cash equivalents of $272.6 million in the aggregate tomeet the Company’s liquidity requirements, of which $122.9 million was held byour subsidiaries in China. China imposes currency exchange controls ontransfers of funds from/to China.  Weexpect to continue to incur losses and negative cash flows from operations overat least the remainder of 2009.

 

OurChina subsidiaries paid an aggregate $150 million in dividends to our U.S.parent company during the year ended December 31, 2007 and another$100 million in February 2008. While these cash transfers are offsetand eliminated in preparing our consolidated cash flow statements, they have beena principal source of funding of our non-China operations during the periods inwhich they were made. In February 2009, our China subsidiaries paid anadditional $50 million in dividends to our U.S. parent company, and additionalcash dividends from our China based subsidiaries to the U.S. parent company maybe necessary to fund our non-China cash requirements in 2009. However, goingforward, the amount of cash available for transfer from the China subsidiarieswill be limited both by the liquidity needs of the subsidiaries in China and byChinese-government mandated requirements including currency exchange controlson transfers of funds outside of China.

 

Currently, our onlycommitted credit sources are our credit facilities in China. At June 30,2009, the credit facilities aggregated $322.0 million, of which $161.0 millionwas available for working capital purposes and the remaining $161.0 million wasrestricted for use in trade financing. The credit facilities do not requirecompliance with any financial covenants, but they do require collateralizationfor working capital draws in excess of $43.9 million or trade financing drawsin excess of $87.8 million. The bank providing our principal credit line addedthe requirement that borrowings above these amounts be secured by ourmanufacturing, research and development, and administrative offices facility inHangzhou, China when this credit line was renewed during the third quarter of2008. At June 30, 2009, $299.4 million of the total credit facilitiesremained available under our credit agreements and usage of the principalcredit line had not reached levels that would require collateral. Furthermore,each borrowing under the credit facilities is subject to the banks’ thencurrent favorable opinion of the credit worthiness of our China subsidiaries,the banks having funds available for lending, and other Chinese bankingregulations. Approximately $263.5 million of these facilities expire during thethird quarter of 2009 and approximately $58.5 million of these lines expire inthe fourth quarter of 2009 and, based upon our recent financial performance andfinancial position, we believe the bank may reduce the total available creditunder this facility when we negotiate its renewal. Accordingly, we cannot be certainthat borrowings under our credit facilities in China will be adequate to meetour financing requirements.

 

In 2009 and 2008, we tooka number of actions to improve our liquidity. In March 2008 we paid$289.5 million to retire our convertible subordinated notes and related accruedinterest. In July 2008 we completed the sale of PCD for proceeds of $219.1million. In addition, we divested out Mobile Solutions Business Unit in July 2008.In the fourth quarter of 2008, management initiated actions to disband ourCustoms Solutions Business Unit and to wind down our Korea operations. 

 

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As a result of theseactions and other restructuring initiatives undertaken by the management, ouryear-to-year quarterly selling, general and administrative and research anddevelopment operating expenses decreased significantly in the second quarter of2009 compared with the second quarter of 2008. In December 2008,management announced further initiatives including efforts to eliminatefunctional duplications by consolidation of a number of key functions into ourChina operations. In June 2009, management expanded the initiatives toinclude a worldwide reduction in workforce, outsourcing of manufacturingoperations and optimizing R&D spending with a focus on selected products.Management believes that these initiatives, if executed successfully, will helpachieve significant operating expense reductions by the fourth quarter of 2009and enable our fixed cost base to be better aligned with operations, marketdemand and projected sales levels. If the level of sales anticipated byour financial plan does not materialize, we will need to take further actionsto reduce costs and expenses or explore other cost reduction options.

 

Management believes thatif we are able to achieve projected sales levels in 2009 and contain expensesand cash used in operations to levels contemplated in our 2009 financial plan,both our China and non-China operations will have sufficient liquidity tofinance working capital and capital expenditure needs during the next 12months. If we are not able to execute our 2009 financial plan successfully, wemay need to obtain funds from equity or debt financings. There can be noassurance that additional financing, if required, will be available on termssatisfactory to us or at all, and if funds are raised in the future throughissuance of preferred stock or debt, these securities could have rights,privileges or preference senior to those of our common stock and newly issueddebt could contain debt covenants that impose restrictions on the ouroperations. Further, any sale of newly issued debt or equity securities couldresult in additional dilution to our current shareholders.

 

Recently, globaleconomies have experienced a significant downturn driven by a financial andcredit crisis that will continue to challenge such economies for some period oftime. Under the current macroeconomic environment there are significant risksand uncertainties inherent in management’s ability to forecast future results.The operating environment confronting us, both internally and externally,raises significant uncertainties. While improvements in our operating results,cash flows and liquidity are anticipated as our 2009 financial plan andmanagement’s initiatives to control and reduce costs while maintaining andgrowing our revenue base are fully implemented, our recurring losses and expectednegative cash flows from operations raise substantial doubt about our abilityto continue as a going concern. Our independent registeredpublic accounting firm included an explanatory paragraph highlighting thisuncertainty in its “Report of Independent Registered Public Accounting Firm”dated March 2, 2009 included in “Part II, Item 8-Financial Statementsand Supplementary Data” in our Annual Report on Form 10-K for the yearended December 31, 2008. The consolidated financial statements do not includeany adjustments relating to the recoverability and classification of recordedassets or the amounts and classification of liabilities or any otheradjustments that may be necessary if the entity is unable to continue as agoing concern.

 

***Income taxes***

 

TheChina Corporate Income Tax Law (“CIT Law”) became effective on January 1,2008.  Under the CIT Law, China’s dualtax system for domestic enterprises and foreign investment enterprises (“FIEs”)was effectively replaced by a unified system. The new law establishes a tax rate of 25% for most enterprises and areduced tax rate of 15% for certain qualified high technology enterprises.

 

Priorto this change in tax law, certain subsidiaries and joint ventures located inChina enjoyed tax benefits in China which were generally available toFIEs.   The tax holidays/incentives forFIEs were applicable or potentially applicable to UTStarcom ChongQing TelecomCo. Ltd. (“CUTS”), UTStarcom Telecom Co., Ltd. (“HUTS”) and UTStarcom ChinaCo., Ltd. (“UTSC”), our active subsidiaries in China, as those entities mayqualify as accredited technologically advanced enterprises.

 

The CIT Law targets certain industries for the reduced 15% tax rate forcertain qualified high technology enterprises.    For FIEs established before thepromulgation of the new law who had previously enjoyed lower tax rates, anyincrease in their tax rates would be gradually phased in over five years.  During the fourth quarter of 2008, two of ourChina subsidiaries, HUTS and UTSC, were approved for the reduced 15% tax rate.The approval lasts for three years and is retroactive to January 1, 2008.

 

The Chinese central government may review and audit tax benefitsgranted by local or provincial authorities and could determine to disallow suchbenefits. Certain of our subsidiaries and joint ventures located in China enjoytax benefits in 

 

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Chinathat are generally available to foreign investment enterprises. If these taxbenefits are reduced, disallowed or repealed due to changes in tax laws ordetermination by the Chinese government, our business could suffer.

 

***Off-balance sheet arrangements***

 

At June 30, 2009, wedo not have any off-balance sheet arrangements.

 

***Contractualobligations and other commitments***

 

Our obligations undercontractual obligations and commercial commitments at June 30, 2009 wereas follows:

 
| ** **           | ** ** | **Payments Due by Period** | ** ** |
|----------------------|------------|----------------------------|------------|
| ** **           | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than  5 years** | ** ** |
| ** **           | ** ** | **(in thousands)**    | ** ** |
| Operating leases     |       | $                          | 13,891     |   | $ | 8,201 |   | $ | 4,359 |   | $ | 1,331 |   | $ | — |   |
| Letters of credit    |       | $                          | 47,272     |   | $ | 28,840 |   | $ | 18,432 |   | $ | — |   | $ | — |   |
| Purchase commitments |       | $                          | 1,607      |   | $ | 1,607 |   | $ | — |   | $ | — |   | $ | — |   |

 

*Operating leases*

 

We lease certainfacilities under non-cancelable operating leases that expire at various datesthrough 2013.

 

*Letters of credit*

 

We issue standby lettersof credit primarily to support international sales activities outside of Chinaand in support of purchase commitments. When we submit a bid for a sale, oftenthe potential customer will require that we issue a bid bond or a standbyletter of credit to demonstrate our commitment through the bid process. Inaddition, we may be required to issue standby letters of credit as guaranteesfor advance customer payments upon contract signing or performance guarantees.The standby letters of credit usually expire six to twelve months from date ofissuance without being drawn by the beneficiary thereof.

 

*Purchase commitments*

 

Weare obligated to purchase raw materials and work-in-process inventory undervarious orders from various suppliers, all of which should be fulfilled withoutadverse consequences material to our operations or financial condition.Purchase commitments in the table above exclude agreements that are cancelablewithout penalty. We had cancelable purchase commitments approximating$57.6 million at June 30, 2009.

 

*Intellectual property*

 

Certain sales contractsinclude provisions under which customers would be indemnified by us in theevent of, among other things, a third-party claim against the customer forintellectual property rights infringement related to our products. There are nolimitations on the maximum potential future payments under these guarantees. Wehave not accrued any amounts in relation to these provisions as no such claimshave been made and we believe we have valid enforceable rights to theintellectual property embedded in our products.

 

*Uncertain tax positions*

 

Effective January 1,2007, we adopted the provisions of FIN 48.  As of June 30, 2009, wehad $66.7 million of gross unrecognized tax benefits. If recognized, theportion of gross unrecognized tax benefits that would decrease the provisionfor income taxes and increase our net income is $9.0 million. The impact on netincome reflects the gross unrecognized tax benefits net of certain deferred taxassets and the federal tax benefit of state income tax items totaling $57.7million. We have not included these amounts in the table of contractualobligations and commercial commitments because of the difficulty in makingreasonably reliable estimates of the timing of cash settlements with therespective taxing authorities.

 

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*Third Party Commissions*

 

We record accruals forcommissions payable to third parties in the normal course of business. Such commissions are recorded based on the terms of the contracts between usand the third parties and paid pursuant to such contracts.  Consistentwith our accounting policies, these commissions are recorded as operatingexpense in the period in which the liability is incurred.  As of June 30,2009, approximately $6.8 million of such accrued commissions had not beenclaimed by the third parties for more than three years.  Management hasperformed, and continues to perform, follow-up procedures with respect to theseaccrued commissions. Upon completion of such follow-up procedures, if theaccrued commissions have not been claimed and the statute of limitations, ifany, has expired or a reasonable period of time has elapsed, we will reversesuch accruals. Such reversals will be recorded in the Statement of Operationsduring the period management determines that such accruals are no longernecessary. During the six months ended June 30, 2009 and 2008, we reversedinsignificant accruals related to third party commissions.

 

**OTHER INFORMATION**

 

In the second quarter of 2009, PricewaterhouseCoopers Zhong Tian CPAsLimited Company, based in the People’s Republic of China and a member of thePricewaterhouseCoopers International Network, assumed responsibility as theindependent registered public accounting firm of the Company. Previously, theCompany’s certifying accountant was PricewaterhouseCoopers LLP in the UnitedStates, also a member of the PricewaterhouseCoopers International Network.

 

**ITEM3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

 

We are exposed to theimpact of interest rate changes, changes in foreign currency exchange rates andchanges in the stock market.

 

***Interest RateRisk***

 

Our exposure to market risk for changes in interest rates relatesprimarily to our investment portfolio. The fair value of our investmentportfolio would not be significantly affected by either a 10% increase ordecrease in interest rates due mainly to the short term nature of most of ourinvestment portfolio. However, our interest income can be sensitive to changesin the general level of U.S and China interest rates since the majority of ourfunds are invested in instruments with maturities of less than one year. In adeclining interest rate environment, as short term investments mature,reinvestment occurs at less favorable market rates. Given the short term natureof certain investments, anticipated declining interest rates will negativelyimpact our investment income.

 

We maintain an investment portfolio of various holdings, types andmaturities. We do not use derivative financial instruments. We place our cashinvestments in instruments that meet high credit quality standards, asspecified in our investment policy guidelines. Our policy is to limit the riskof principal loss and to ensure the safety of invested funds by generallyattempting to limit market risk. Funds in excess of current operatingrequirements are mostly invested in money market funds which are rated AAA. Ourcash and cash equivalents are not subject to significant interest rate risk dueto the short maturities of these instruments. As of June 30, 2009 thecarrying value of our cash and cash equivalents approximated fair value.

 

The table belowrepresents carrying amounts and related weighted-average interest rates of ourinvestment portfolio at June 30, 2009:

 
| ** **                   | ** ** | **(in thousands, except** | ** ** |
|------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **interest rates)**            | ** ** |
| Cash and cash equivalents    |       | $                                   | 272,596    |   |
| Average interest rate        |       | 0.75                                | %          |
|                         |       |                                |       |
| Restricted cash - short-term |       | $                                   | 15,112     |   |
| Average interest rate        |       | 0.18                                | %          |
|                         |       |                                |       |
| Short-term investments       |       | $                                   | 3,448      |   |
| Average interest rate        |       | 1.10                                | %          |
|                         |       |                                |       |
| Restricted cash - long-term  |       | $                                   | 18,432     |   |
| Average interest rate        |       | 0.30                                | %          |
|                         |       |                                |       |
| Total investment securities  |       | $                                   | 309,588    |   |
| Average interest rate        |       | 0.70                                | %          |

 

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***EquityInvestment Risk***

 

Our investment portfolioincludes an equity investment in a publicly traded company, the value of whichis subject to market price volatility. Economic events could adversely affect the public equities market andgeneral economic conditions may worsen. Should the fair value of our publicly traded equity investments declinebelow their cost basis in a manner deemed to be other-than-temporary, ourearnings may be adversely affected.  Wehave also invested in several privately held companies as well as investmentfunds which invest primarily in privately held companies, many of which canstill be considered in the start-up or development stages.  These investments are inherently risky, asthe market for the technologies or products they have under development aretypically in the early stages and may never materialize.

 

***ForeignExchange Rate Risk***

 

As a multinationalcompany, we conduct our business in a wide variety of currencies and aretherefore subject to market risk for changes in foreign exchange rates.  We expect to continue to expand our businessglobally and, as such, expect that an increasing proportion of our business maybe denominated in currencies other than U.S. Dollars.  As a result, fluctuations in foreigncurrencies may have a material impact on our business, results of operationsand financial condition.

 

Historically,the majority of our foreign-currency denominated sales have been made in China,denominated in Renminbi. Additionally, during 2006, 2007, 2008 and through the secondquarter of 2009, we made significant sales in Japanese Yen, Euros, IndianRupees and Canadian Dollars. Due to China’s currency exchange controlregulations, we are limited in our ability to convert and repatriate Renminbi,as well as in our ability to engage in foreign currency hedging activities inChina. The balance ofour cash held in China was $122.9 million at June 30, 2009.  Since China un-pegged the Renminbi from theU.S. Dollar in July, 2005, through June 30, 2009, the Renminbi hasstrengthened by more than 15% versus the U.S. Dollar.  However, it is uncertain what furtheradjustments may be made in the future.

 

We may manage foreigncurrency exposures using forward and option contracts to hedge and thusminimize exposure to the risk of the eventual net cash inflows and outflowsresulting from foreign currency denominated transactions with customers,suppliers, and non-U.S. subsidiaries, however, we are not currently hedging anysuch transactions.  As our foreigncurrency balances are not currently hedged, any significant revaluation of ourforeign currency exposures may materially and adversely affect our business,results of operation and financial condition. We do not enter into foreign exchange forward or option contracts fortrading purposes.

 

Given our exposure tointernational markets, we regularly monitor all of our material foreigncurrency exposures.  We use sensitivityanalysis to measure our foreign currency risk by computing the potentialdecrease in cash flows that may result from adverse or beneficial changes inforeign exchange rates, relative to the functional currency with all othervariables held constant.  The analysiscovers all of our underlying exposures for foreign currency denominatedfinancial instruments.  The foreigncurrency exchange rates used were based on market rates in effect at June 30,2009.  The sensitivity analysis indicatedthat a hypothetical 10% adverse or beneficial movement in exchange rates wouldhave resulted in a loss or gain in the fair values of our foreign currencydenominated financial instruments of $20.6 million at June 30, 2009.

 

**ITEM4—CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

UTStarcom, Inc. (“UTStarcom”or the “Company”) maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the reports theCompany files or submits pursuant to the Securities Exchange Act of 1934, asamended (“Exchange Act”), is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s (“SEC”)rules and forms, and that such information is accumulated and communicatedto the Company’s management, including its chief executive officer (“CEO”) andchief financial officer (“CFO”), as appropriate, to allow timely decisionsregarding required financial disclosure.

 

In connection with thepreparation of this Quarterly Report on Form 10-Q (“Form 10-Q”), theCompany carried out an evaluation as of June 30, 2009 under thesupervision and with the participation of the Company’s management, includingthe CEO and CFO, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act. Based upon this evaluation, managementconcluded that as of June 30, 2009 the Company’s disclosure controls andprocedures were not effective because of the material weaknesses described in “Management’sAnnual Report on Internal Control over Financial Reporting,” included in

 

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“Part II, Item 9A -Controls and Procedures” (“Item 9A”) in the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008 (the “2008 Annual Report”), aswell as the material weakness related to revenue recognition described in the “NewlyIdentified Material Weakness in Internal Control over Financial Reporting”included in “Part I, Item 4 — Controls and Procedures” (“Item 4”) in theCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31,2009 (“March 31, 2009 10-Q”), which have not yet been remediated.Investors are directed to Item 9A in the 2008 Annual Report and Item 4 in the March 31,2009 10-Q for the description of these weaknesses.

 

A “material weakness” isa deficiency, or a combination of deficiencies, in internal control overfinancial reporting, such that there is a reasonable possibility that amaterial misstatement of the Company’s annual or interim financial statementswill not be prevented or detected on a timely basis. To address the materialweaknesses in internal control over financial reporting noted above, theCompany performed additional analyses and other procedures (as furtherdescribed below under “Management’s Planned Remediation Initiatives and InterimMeasures”) to ensure that the Company’s consolidated financial statements wereprepared in accordance with generally accepted accounting principles in theUnited States (“GAAP”). Accordingly, the Company’s management believes that theconsolidated financial statements included in this Form 10-Q fairlypresent in all material respects the Company’s financial condition, results ofoperations and cash flows for the periods presented and that this Form 10-Qdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the periods covered by this report.

 

**Management’sPlanned Remediation Initiatives and Interim Measures**

 

The Company plans to makenecessary changes and improvements to the overall design of its controlenvironment to address the material weaknesses in internal control overfinancial reporting noted above. In particular, the Company implemented during2008 and the first and second quarters of 2009, and plans to continue toimplement during 2009, the specific measures described below.  In addition, in connection with the June 30,2009 quarter-end reporting process, the Company has undertaken additionalmeasures described under the subheading “Interim Measures” below to providereasonable assurance regarding the reliability of financial reporting and thepreparation of the Company’s consolidated financial statements included in thisForm 10-Q and to ensure that material information relating to the Companyand its consolidated subsidiaries was made known to management in connectionwith the preparation of this Form 10-Q.

 

***RemediationInitiatives***

 

1.     To remediate the material weakness described in Item 9A in the2008 Annual Report, in “*The Company did notmaintain effective controls at its U.S. headquarters over the appropriatematching of costs of sales with revenue and the recording of reserves forlosses on customer contracts,*” the Company’s planned remediationmeasures are intended to address material weaknesses that have the potential ofmisstating these balances in the financial statements in future financialperiods. These measures include the following:

 

i.      During 2008, the Company implemented an upgrade to itsenterprise resource planning (“ERP”) system, which provided enhanced automatedfeatures and controls around the matching of cost of sales to revenue. In theremainder of fiscal 2009, we will continue to enhance the automated controlsand the review procedures over the reports generated from the ERP system.

 

ii.     In the third and fourth quarters of 2008, the Companytransitioned the responsibility for calculating the loss contract reserves toits local project office in India to facilitate enhanced coordination betweenthe local business units, operations, sales and the finance team. In theremainder of 2009, we will continue to enhance the timeliness and quality ofthe information to enable a more effective review of the components of the lossreserve calculation by the business units, operations, sales and finance teams.In addition, corporate finance management will perform enhanced independent andtimely reviews of the loss contract reserve calculation.

 

2.     To remediate the material weakness described in Item 9A in the2008 Annual Report, in “*The Company did notmaintain effective controls at its US headquarters over the period-endfinancial reporting process*” the Company added technical resourcesto the corporate finance team in the U.S. late in the third quarter of fiscal2008. In the remainder of 2009, the Company is also planning to increasetechnical resources in China and such additional technical resources willenable the Company to broaden the scope and quality of the independent reviewsof underlying information related to the Company’s period-end financialreporting process, to standardize the processes for such financial reviews andto ensure the reviewers analyze and monitor financial information in aconsistent and thorough manner.

 

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3.     To remediate the newly identified material weakness described in the Item 4 of the March 31, 200910-Q in “*The Company identified a material weakness in itsinternal control over financial reporting related to revenue recognition,*”the Company is planning in the remainder of 2009 to enhance its contractsreview process in order to ensure that appropriate members of management havereviewed and confirmed critical information necessary to assess the properrevenue recognition accounting.

 

**Interim Measures**

 

Management has not yet implemented all of the measures described aboveunder the heading “*Remediation Initiatives*”and/or tested them. Nevertheless, management believes the measures identifiedabove to the extent they have been implemented, together with other measuresundertaken by the Company in connection with the preparation of the condensedconsolidated financial statements included in this Form 10-Q and describedbelow, address the material weaknesses in internal control over financialreporting described above. These other measures include the following:

 

1.     Analysis of the backlog report and gross margin report, as wellas extensive reviews of the reserves for losses on customer contracts, inIndia, including reviews of the inventory cost against the current cost backlogreport, and reconciliation between the local cost records to the cost recordsat the Company’s headquarters.

 

2.     A variety of manual review procedures, such as an extensivereview of journal entry postings into the ERP system, a thorough review ofaccount reconciliations, including revenue and deferred revenue accounts, and adetailed review at its U.S. headquarters of trial balances including thoseissued from decentralized locations, to ensure the completeness and accuracy ofthe underlying financial information used to generate the financial statements.

 

***Management’s Conclusion***

 

Management believes theremediation measures described under “Management’sPlanned Remediation Initiatives and Interim Measures” above willstrengthen the Company’s internal control over financial reporting andremediate the material weaknesses identified above. However, management has notyet implemented all of these measures and/or tested them.  Management believes that the interim measuresdescribed under “Management’s Planned Remediation Initiatives and InterimMeasures” above ensure the reliability of financial reporting and thepreparation of the Company’s financial statements included in this Form 10-Qand has discussed this with the Company’s Audit Committee.

 

The Company is committedto continuing to improve its internal control processes and will continue todiligently and vigorously review its disclosure controls and procedures and itsinternal control over financial reporting in order to ensure compliance withthe requirements of Section 404 of the Sarbanes-Oxley Act of 2002.However, any control system, regardless of how well designed, operated andevaluated, can provide only reasonable, not absolute, assurance that itsobjectives will be met. As management continues to evaluate and work to improvethe Company’s internal control over financial reporting, it may determine totake additional or alternate measures to address control deficiencies, and itmay determine not to complete certain of the measures described under “Management’s Planned Remediation Initiativesand Interim Measures” above.

 

**Changesin Internal Control over Financial Reporting**

 

No changes occurredduring the three months ended June 30, 2009 in our internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II—OTHERINFORMATION**

 

**ITEM 1—LEGALPROCEEDINGS**

 

For a description oflitigation and governmental investigations, see Note 10 to our CondensedConsolidated Financial Statements included under Part 1, Item 1 of thisQuarterly Report on Form 10-Q.

 

**ITEM 1A—RISKFACTORS**

 

For a description of risk factors that could materially affect ourbusiness, financial condition and future operating results, please consider therisk factors set forth in “Part I, Item 1A — Risk Factors” of our Annual Report on Form 10-K for thefiscal year ended December 31, 2008. The description below includes material changes to therisk factors as previously disclosed in our Annual  Report on Form 10-K for the fiscal yearended December 31, 2008.  Additional risks and uncertainties not currently knownto us or that we currently deem to be immaterial also may materially andadversely affect our business, financial condition or future operating results.

 

*Ourcost-reduction initiatives and restructuring plans may not result inanticipated savings or more efficient operations. Our recently-announcedrestructuring may disrupt our operations and adversely affect our operationsand financial results.*

 

On June 11, 2009, we announced a restructuringof our worldwide operations in an effort to accelerate the Company’s return to profitability, strategicallyalign our cost structure with expected revenues and reallocate resources intoareas of our business that we believe have more growth potential.

 

We may not be able to successfully complete andrealize the expected benefits of our restructuring plans.  Our restructuring plans may involve highercosts or a longer timetable, or they may fail to improve our results ofoperations and cash flows as we anticipate. Our inability to realize these benefits may result in an ineffectivebusiness structure that could negatively impact our results of operations.  In addition to costs related to severance andother employee-related costs, our restructuring plans may also subject us tolitigation risks and expenses.

 

In addition, our restructuring plans may have otheradverse consequences, such as employee attrition beyond our planned reductionin workforce, the loss of employees with valuable knowledge or expertise, anegative impact on employee morale, or a gain in competitive advantage by ourcompetitors over us.  The restructuringmay place increased demands on our personnel and could adversely affect ourability to attract and retain talent, to develop and enhance our products andservices, to service existing customers, to achieve our sales and marketingobjectives and to perform our accounting, finance and administrative functions.

 

We may undertake future cost-reduction initiativesand restructuring plans that may adversely impact our operations; and we maynot realize all of the anticipated benefits of our prior or any futurerestructurings.

 

At the same time as our restructuring announcement,we announced an intention to consider a potential sale of our manufacturing,research and development, and administrative offices facility in HangzhouChina.  We may encounter difficulties anddelays in connection with any sale of the building.  The building is approximately 2.7 millionsquare feet and unique in its design and is included in property, plant andequipment in our condensed consolidated balance sheet  as of June 30, 2009 with a carryingvalue of $162.0 million. If we decide to sell this building, we cannot predictwhether we will be able to sell the building or the amount at which we wouldultimately be able to sell the building. In addition, in connection with evaluating a sale of the building wecould determine that an impairment charge should be recorded by the company anda significant impairment charge could lead to an unexpected and materialdecline in our earnings.

 

**ITEM 2—UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None

 

**ITEM 3—DEFAULTSUPON SENIOR SECURITIES**

 

None

 

**ITEM 4—SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

We held our annual meeting of stockholders on June 25, 2009. At themeeting, our stockholders voted on the following two proposals, casting theirvotes as follows:

 

(i)  To elect two Class III directors to serve for a termexpiring on the date on which the annual meeting of stockholders is held in theyear 2012.

 

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| **Nominee**   | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|---------------|------------|------------|------------|-------------|------------|-------------|------------|
| Jeff Clarke   |       | 75,223,760 |       | 27,348,029  |       | 7,008,112   |       |
| Hong Liang Lu |       | 75,179,445 |       | 27,440,900  |       | 6,959,556   |       |

 

There were no broker non-votes on this matter. As a result, Messrs. Clarkeand Lu were re-elected as directors of the Company. Other directors whose termsof office continued after the meeting were as follows:

 

**Class I (Term Expiring 2010)**

 

Thomas J. Toy

Bruce J. Ryan

 

**Class II (Term Expiring 2011)**

 

Peter Blackmore

Allen Lenzmeier

 

(ii)  To ratify and approve the appointment of PricewaterhouseCoopersLLP as the Company’s independent registered public accounting firm for thefiscal year ending December 31, 2009.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 90,375,909 |       | 18,934,204  |       | 269,788     |       |

 

There were no broker non-votes on this matter.

 

**ITEM 5—OTHERINFORMATION**

 

None

 

**ITEM 6—EXHIBITS**

 
| **Exhibit  Number** | ** ** | **EXHIBIT DESCRIPTION**                                                                                                                                                                                                        |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Thirteenth  Amended and Restated Certificate of Incorporation of UTStarcom, Inc., as  amended (incorporated by reference to Exhibit 3.1 of Current Report on  Form 8-K filed with the SEC on December 12, 2003) |
| 3.2                 |       | Second  Amended and Restated Bylaws of UTStarcom, Inc., effective June 28,  2008 (incorporated by reference to Exhibit 3.1 of Current Report on  Form 8-K filed with the SEC on April 14, 2008)            |
| 4.1                 |       | See  exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and  Bylaws defining the rights of holders of Common Stock.                                                                                            |
| 4.2                 |       | Specimen  Common Stock Certificate (incorporated by reference to Exhibit 4.1 of  Form S-1/A filed with the SEC on February 7, 2000)                                                                                  |
| 4.3                 |       | Third  Amended and Restated Registration Rights Agreement dated December 14,  1999 (incorporated by reference to Exhibit 4.2 of Form S-1 filed  with the SEC on December 20, 1999)                              |
| 10.1                |       | Settlement  Agreement & Release dated as of June 30, 2009 (incorporated by  reference to Exhibit 10.1 of Form 8-K filed with the SEC on  July 2, 2009)                                                 |
| 10.2                |       | Form of  Stock option Award Agreement for use under 2006 Equity Incentive Plan                                                                                                                                                 |
| 10.3                |       | Form of  Stock Option Agreement for Directors and Officers for use under the 2006  Equity Incentive Plan                                                                                                                       |
| 31.1                |       | Certification  of the Chief Executive Officer pursuant to Rule 13a-14(a) or  Rule 15d-14(a) promulgated under the Securities Exchange Act of  1934, as amended                                                  |
| 31.2                |       | Certification  of the Chief Financial Officer pursuant to Rule 13a-14(a) or  Rule 15d-14(a) promulgated under the Securities Exchange Act of  1934, as amended                                                  |
| 32.1                |       | Certifications  of the Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                          |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                      |     | UTSTARCOM, INC. |
|---------------------------|----------|----------------------|
|                      |     |                 |   |
| Date: August 7, 2009 |     | By:                  | /s/ VIRAJ J. PATEL |
|                      |     |                 | Viraj J. Patel |
| * *                  | * * | * *             | *Interim  Chief Financial Officer* |
| * *                  | * * | * *             | *(Principal Financial Officer)* |

 

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